On 5 December 2019 it was announced that Balter Brewing Company, an independent beer manufacturer, had been sold to Carlton United Breweries (who themselves are in the process of being purchased by Japanese company Asahi).

So, of the few major terms that have been reported on in various media sources what are they and what are the lessons here?

Earn out provisions

It was reported in the online surf news site beachgrit (beachgrit.com) that the sale to CUB included sales targets for the existing management of Balter to hit over three and five year periods.

These earn out provisions mean that the sales price has the potential to increase over the medium term to substantially increase depending on how Balter go at escalating sales growth.

For business owners looking to sell, the question then is should I consider earn out provisions?

Generally, the answer will come down to individual circumstances. In the case of Balter, I would guess that the management team are confident that they can grow Balter’s sales with the added power of CUB’s manufacturing and distribution network.

That said, the caution here is that where disputes occur in business sales they often link to these type of provisions.

When considering whether to agree to earn out provisions, a company’s management team and advisers need to be confident that there is clarity around the targets, how they will be hit and more importantly, measured.

If you are not certain as to how any targets will be met and measured then it will be best to negotiate a higher purchase price (if possible) and leave it to the new owners to hit the targets.

After all, a bird in the hand is worth two in the bush.

Debt

There are two points to consider here.

First, Balter had grown significantly since it was founded and so any purchase has presumably included CUB taking on some existing debt. Be aware when negotiating a sale that debt must be included in the conversation.

Second, the plans to expand the business any further would also inevitably mean more debt being incurred. The sale of the business at this point allows the owners to exit before significant additional debt has to be incurred, essentially moving the risk of expansion to CUB while they retain upside with the earn out provisions.

Business Continuation

Many business founders like to see some continuation to what they’ve built drawn into the terms of a contact.

In Balter’s case, this means that recipes, suppliers and other business operations (ie, employee retention) are guaranteed for five years.

These again, can be tricky clauses to draft and perhaps, more importantly, enforce. For example, will the previous owners of Balter be all that concerned if in two years time CUB begin changing suppliers? More importantly perhaps, what, if anything, will they do about it?

The point here being that, unless there is some mechanism and also some motivation, to abide by these sorts of terms then they can often prove to be worthless. Particularly if you need to take legal action against a company the size of CUB / Asahi.

Regardless of the above, the Balter sale appears to have been a good transaction that will benefit both the sellers and purchaser.

Other business owners looking to sell should note that they should always make sure they carefully consider the terms of their sale to suit their circumstances and be careful in how they are drafted.