What You Need to Know When Selling Shares with Progressive Payments
You are the owner of a business selling cookies and cakes. You are making good business with 2 outlets. One of the big coffee chains like Zus Coffee or Oasis Harvest, who bought Chef Wan’s restaurants and cafes https://theedgemalaysia.com/node/757733 offers to buy your shares in your business. The offer is too good to reject. But they are only willing to pay the purchase price progressively. Should you still sell?
Selling shares in a company can be an exciting and profitable move. But when the payment is made progressively — meaning it’s paid in installments over time instead of all at once — there are several things you should think about carefully. This article explains what progressive payment means, why it might be used, and most importantly, what concerns you, as the seller, should be aware of before agreeing to such a deal.
What Is a Progressive Payment?
A progressive payment, also known as deferred payment or installment-based payment, is when the buyer pays for your shares in parts rather than paying the full amount upfront. For example:
– You sell 10,000 shares worth RM1.00 each.
– Instead of receiving RM10,000 right away, the buyer agrees to pay RM2,000 every year for five years.
This type of arrangement is common in private companies where the buyer may not have enough cash on hand or wants to spread out the cost based on future profits or performance.
Now let’s look at some key concerns you should keep in mind if you’re considering this kind of deal.
1. Risk of Non-Payment
The biggest risk in any deferred payment plan is that the buyer might not pay you everything they promised.
Example:
You agree to receive RM50,000.00 over five years for your shares. Two years into the deal, the company starts losing money, and the buyer stops making payments.
As the seller, you could end up losing part of the agreed-upon value unless you have strong protections in place.
How to Protect Yourself:
– Include clear penalties for missed payments in the contract.
– Ask for collateral (like other assets or guarantees) to secure the payments.
– Consider getting insurance or third-party guarantees to back up the payments.
2. Loss of Control After Sale
Once you sell your shares, you typically no longer own a piece of the company. That means you no longer get to influence decisions, even though you’re still waiting for your money.
Example:
You sell your shares but still expect the company to grow so the buyer can pay you. However, after the sale, the new owner makes poor decisions that hurt the business, reducing their ability to pay you.
What You Can Do:
– Try to include certain rights or oversight clauses in the agreement, like being consulted on major decisions.
– Make sure the buyer has a solid track record and a good business plan.
3. Failure to Complete Take-Over
Imagine this:
You own 60% of a small business and agree to sell your shares to a buyer who wants full control. The deal is structured so that they pay you in installments over three years. Once all payments are made, they’ll own 100% of the company, and you’ll be completely out.
But halfway through the payment schedule, the buyer runs into financial trouble. They stop paying. Now what?
Suddenly, you’re stuck:
- You’ve already sold part of your stake (or maybe all of it on paper).
- The buyer doesn’t want to continue the deal.
- You no longer have control of the business, but you also haven’t received the full payment.
- You may now be forced to work with someone who has lost interest in running the business — or even in paying you.
This is the danger of an incomplete take-over .
Closely related to points 1 & 2, if the seller had planned for a complete take-over and a full exit on your part but non-payment of the balance payment also results in the seller losing interest in completing the complete take-over, you are now stuck in a position where your share partner is no longer interested in doing business.
What You Can Do:
– Include Clear Default Clauses. Define exactly what happens if a payment is missed:
- Is there a grace period?
- What constitutes a breach of the agreement?
- Can you reclaim your shares or reduce their ownership?
– Use Escrow or Holdback Arrangements. Instead of transferring all your shares upfront, consider releasing them gradually as payments are made. Alternatively, keep a portion of the buyer’s payments in escrow until the transaction is fully completed.
– Add Clawback Provisions. A clawback clause allows you to reclaim your shares or get compensation if the buyer fails to meet their payment obligations.
– Set Conditions for Exit. Decide in advance what happens if the buyer wants to quit:
- Do they forfeit their payments?
- Do they give up their shares?
- Can you force a buyout of their stake?
– Retain Voting Rights Until Full Payment. Until you receive all the money, consider keeping certain voting rights or decision-making powers to protect your interests in the business.
4. Changes in Company Value Over Time
When you sell shares, especially with delayed payments, the value of the company may change over time — and not always in your favor.
Example:
You sell shares today for RM100,000.00, expecting the company to grow and make those payments easy to cover. But if the business struggles, the company’s value drops, and the buyer may claim they can’t afford to pay the full amount.
How to Handle It:
– Decide whether the total price is fixed or tied to the company’s future performance.
– If it’s tied to performance, use clear metrics like revenue, profit, or appraised value to determine how much will be paid each time.
5. Legal Enforcement Can Be Difficult and Expensive
If the buyer breaks the agreement, taking legal action can be time-consuming and costly. Especially in smaller businesses or private deals, enforcing contracts can be harder than you think.
Example:
After three years, the buyer stops paying. You go to court, but the process takes two years and costs thousands in legal fees. Even if you win, collecting the money might still be difficult.
How to Prepare:
– Use a well-drafted contract reviewed by a lawyer.
– Make sure the buyer signs the agreement and keeps copies.
6. Negotiating Fair Terms
It’s important to understand the true value of your shares and ensure you’re not accepting less just because the buyer offers installment payments. It should be reminded that the law does not concern itself whether the value is fair or not. This means that the seller and buyer are bound by the price they offer, even if it is below market price or not the true value of the shares.
Another point to consider is that – it is advisable for you to have your own lawyers. It is not the responsibility and duty of the buyers lawyers to advice you of the risks and the terms of the agreement. The duty of the buyers lawyers is to the buyer; it is your own lawyer that will advice you on the agreement and of your risks.
Example:
You believe your shares are worth RM100,000.00. The buyer offers RM90,000.00 over five years. At first glance, it seems fair, but due to inflation and risk, the real value of RM90,000.00 paid over five years might actually be less than RM70,000.00 received today.
Things to Consider:
– Use present value calculations to compare lump sum vs. installment offers.
– Ask for interest on unpaid amounts to compensate for the delay.
– Always get an independent valuation of the company before agreeing to a price.
7. Communication and Relationship Management
Ongoing relationships with buyers are more complicated when payments are spread out. Misunderstandings or personal conflicts can lead to problems.
Example:
You and the buyer were friends before the deal. Over time, disagreements arise about how the business is run, and the buyer delays payments as a result.
Best Practices:
– Keep communication clear and professional.
– Set regular check-ins or reporting requirements.
– Avoid mixing personal emotions with business obligations.
Final Thoughts: Proceed with Caution and Clarity
Selling shares with progressive payments can work well if both parties are honest, capable, and committed. But it also comes with risks that you need to manage carefully.
Before signing any agreement:
– Get legal and financial advice.
– Understand the terms fully. Remember – an unfair agreement is still a valid and enforceable contract.
– Ensure the buyer is trustworthy and financially stable. You can do a due diligence or at least a simple background check and inspections of audited accounts.
– Protect yourself with solid contracts and backup plans.
By thinking ahead and planning wisely, you can protect your interests while still benefiting from a flexible selling arrangement.
Remember, selling shares is not just about getting a good price — it’s about getting the right kind of payment under the right conditions. Take your time, ask questions, and don’t rush into a deal just because someone is willing to buy.
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