Buyer’s conditions to closing in purchasing an auto dealership

Review them carefully before committing

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This article was originally published in Automotive Buy Sell Report, on January 18, 2017.

This article addresses a buyer’s conditions to closing in a dealership asset purchase agreement. Buyers should carefully review and negotiate these provisions, which can materially affect whether they should or will commit to a purchase. If one or more buyer conditions are not satisfied or waived before the closing, the buyer typically has the right to walk away from the deal, without having any remaining liability (unless a separate provision of the agreement creates such liability). Here are some typical buyer conditions:

1) Manufacturer and Governmental Approval

A buyer of a new vehicle franchise should always require approval from the manufacturer as a condition to closing since the value of a dealership acquisition is in the ability to continue the existing franchise. The manufacturer’s approval should be without any stipulations or conditions that the franchise be moved, unless that is the buyer’s desire. Beyond merely approving a new dealer agreement with the buyer, buyers will often want the manufacturer to “clear the market,” i.e. provide notice to other franchisees within the relevant market area (e.g., a 10-mile radius) and obtain a legal waiver of any rights they have to protest the new franchise. Additionally, buyers should obtain a condition requiring authorization and/or necessary permits from all government and regulatory bodies (e.g., a DMV dealer’s license) whose consent is necessary to operate a dealership, even if the subject dealership is not franchised.

2) Materially Adverse Events

Many asset purchase agreements require that the existing dealership not experience any event before closing that materially and adversely affects the assets being purchased or the dealership business or buyer’s ability to operate it. Such a provision could be crucial if, for example, the dealership premises are destroyed shortly before the closing, the factory goes belly up, termination proceedings are initiated, or the Seller becomes bankrupt. A significant issue in these provisions is defining “materiality” — how seriously the adverse event would need to impact the dealership assets, or business’ operations or value, before the contract allows the buyer to walk away. In addition to carefully drafting a provision that covers any situation that can adversely affect the dealership and its assets, a buyer may want to include a non-exhaustive list of such events, such as, for example, damage that would require repair to 25% or more of the premises.

3) Absence of Litigation

A buyer’s ideal litigation condition would require that there be no litigation pending prior to the closing. However, this may be unrealistic since litigation against dealerships is not uncommon. A different condition could require no pending litigation that is likely to result in more than a set settlement or damage in a specified amount. A buyer could also agree to a provision that prohibits pending litigation only if it is likely to prevent or delay the acquisition or would impose limitations on buyer’s ability to close, e.g., a Board protest or bankruptcy proceedings. Or the provision could cover only litigation that constitutes a materially adverse event. At a bare minimum, buyers should require sellers to provide a list of all pending litigation, which should be compared to a list that is independently researched and compiled by the buyers’ attorneys.

4) Due Diligence

Asset purchase agreements often allow buyers to waive any condition to closing if they do so in writing, but include a provision by which certain conditions are waived automatically by a date before the closing (the “due diligence deadline”) if buyer does not object that a condition has not been met. Buyers should carefully negotiate the due diligence deadline to ensure that they have sufficient time for inspection of the dealership assets and business and satisfaction of all conditions. (Read our January 13, 2016, article in Automotive Buy Sell Report on due diligence provisions in real estate purchase agreements for more thoughts on that topic).

Since the buyer’s conditions to closing affect whether or not the buyer will be obligated to complete a dealership purchase, buyers should exercise caution in negotiating and drafting these provisions. Sellers will want to ensure that conditions do not offer a buyer an easy way out of a deal merely because they are having second thoughts. We recommend monitoring any deadlines related to closing conditions carefully and utilizing experienced automotive counsel in analyzing and drafting these provisions.