Pitfalls for price protection & price escalation clauses in sales contracts
June 03, 2022
by a professional from University of Southern California - Marshall School of Business in North Palm Beach, FL, USA
It’s happening more often. Owners selling SMBs to buyers who, later, are blindsided by the inclusion of dangerous price protection clauses and/or the exclusion of price escalation clauses. I’ll cover that after these definitions:
Price escalation clauses can limit risk, to sellers of products and services, during the term of sales contracts, when COGS are rising and/or there are problems with their supply chain.
Price protection clauses in purchase/sales contracts freeze the price of whatever is being purchased for a specific amount of time.
It was good news/bad news for the sellers and buyers of SMBs. Last month I was apprised of two fatal acquisitions by buyers who (apparently) did not, during due diligence, realize that the price protection clauses in some of the sales contracts with customers (especially key customers) prohibited price increases during their remaining 3- and 5-year terms. Opps!
COGS soared. Supply chain disruptions; late deliveries, substitutions. Hello insolvency. (No lender or investor would contribute cash.)
The good news: The well-advised and represented sellers did not get caught holding the bag. They sold their SMBs for a top-of-market multiple to naïve buyers, laughing all the way to their banks.
Try this if you want to improve cash flow: https://tinyurl.com/3nsewnnd
from University of California, Berkeley in Seattle Metropolitan Area, WA, USA