Business Sale Agreement in Sri Lanka: What Sellers Must Get Right Before Signing

For many business owners, the hardest part of selling a business is not finding a buyer.
It is signing the sale agreement.

By the time the agreement arrives, sellers are often:

• emotionally tired,

• eager to finish,

• relieved that someone wants to buy,

• afraid the buyer might walk away.

That is exactly when mistakes are made.

In Sri Lanka, most seller problems do not arise at negotiation stage.
They arise after signing, because sellers did not fully understand what they agreed to.

This article is written for business owners (sellers). It explains:

• what a business sale agreement really does,

• the clauses that most affect sellers,

• where sellers unknowingly take on risk,

• and how to protect yourself before signing.

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First principles: the sale agreement is not a formality

Many sellers think:

“We already agreed the price. This is just paperwork.”

That is dangerous thinking.

The sale agreement overrides:

• verbal discussions,

• WhatsApp messages,

• emails,

• even the Letter of Intent.

Once signed, the agreement defines:

• what you sold,

• what you promised,

• what you are still responsible for,

• and what can be claimed against you later.

You are not just transferring a business.
You are allocating risk.

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Asset sale vs share sale: why this matters immediately

Before reading anything else, sellers must know what they are actually selling.

Asset sale (most common for SMEs)

You sell selected assets and goodwill.

Typical seller advantages:

• cleaner break,

• fewer historical liabilities,

• more control over what is transferred.

Typical seller risks:

• vague asset lists,

• disputes over stock, brand, digital assets,

• lease and licence complications.

Share sale

You sell shares in the company.

Typical seller advantages:

• continuity of contracts and licences,

• simpler operational transition.

Typical seller risks:

• you sell the entire history of the company,

• buyers rely heavily on warranties,

• higher post-sale liability exposure.

If you do not clearly understand which structure you are signing for, stop.

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“What exactly am I selling?” — scope of sale (critical)

This is the most common source of post-sale disputes.

A good sale agreement must clearly list:

Included items

• equipment, machinery, furniture

• stock (or how it is treated)

• brand name and goodwill

• phone numbers, WhatsApp numbers

• website, domain, social media pages

• customer lists (if any)

• supplier relationships (if transferable)

• licences or approvals (if applicable)

• lease rights (subject to consent)

Excluded items

• cash in bank

• old receivables

• old payables

• owner’s personal assets

• personal vehicles or phones

Seller mistake:

“It’s obvious what’s included.”

It is never obvious once money is involved.

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Purchase price and payment terms: where sellers get trapped

Many sellers focus only on the headline price.

They should focus equally on:

• when they get paid,

• how they get paid,

• and what happens if payment stops.

Key issues sellers must read carefully

• Is the price fixed or adjustable?

• Is stock included or separate?

• Are there holdbacks or deferred payments?

• Are instalments involved?

• What is the remedy for late or missed payments?

If instalments are involved, remember:

You are extending credit.

The agreement must protect you accordingly.

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Warranties: promises about the past

Warranties are statements you make about the business.

In plain English:

You are saying, “These things are true. If not, I may be liable.”

Common warranties sellers give without realising the risk:

• accounts are accurate

• taxes are properly paid

• licences are valid

• no undisclosed liabilities exist

• no disputes are pending

• compliance with laws

Seller mistake:

“These are standard.”

Standard does not mean harmless.

You should only give warranties you can honestly and confidently support.

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Indemnities: where sellers pay after the sale

Indemnities are more serious than warranties.

They usually mean:

“If this specific issue arises, I will pay you rupee for rupee.”

Common indemnities in Sri Lankan deals:

• tax exposures

• EPF/ETF liabilities

• employee claims

• regulatory penalties

Indemnities can:

• bypass liability caps,

• survive longer than warranties,

• apply even if the buyer knew about the issue.

Sellers should:

• limit indemnities to known risks,

• cap amounts where possible,

• limit duration.

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Non-compete and non-solicitation clauses

Non-compete clauses restrict what you can do after selling.

They often cover:

• time (e.g. 2–5 years),

• geography,

• type of business.

Seller risks:

• blocking future livelihood,

• accidental breach,

• restrictions broader than necessary.

Non-solicitation clauses may restrict:

• contacting former customers,

• hiring former staff.

These should be reasonable and specific, not blanket bans.

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Seller’s post-sale obligations (often underestimated)

Many agreements include clauses like:

“Seller shall provide reasonable assistance.”

Without limits, “reasonable” becomes unlimited.

Sellers should clarify:

• duration of handover support,

• number of hours/days,

• scope of assistance,

• whether it is paid or unpaid.

If you want a clean exit, define boundaries clearly.

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Employees, EPF/ETF, and labour exposure

Employment issues are sensitive in Sri Lanka.

Key seller questions:

• Are employees transferring or being terminated?

• Who is responsible for past EPF/ETF?

• What happens if an employee claims unpaid dues?

Buyers often try to push historical employment risk back to sellers.

The agreement must clearly allocate:

• responsibility for past obligations,

• responsibility after completion.

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Lease, licences, and third-party consents

Sale agreements often say:

“Seller shall obtain all necessary consents.”

This can be dangerous if:

• landlord consent is uncertain,

• licences are non-transferable,

• authorities delay approvals.

Seller risk:

• being in breach through no fault of your own.

Agreements should:

• make completion conditional on consents,

• allow termination if consent is refused,

• avoid absolute promises beyond your control.

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Default, termination, and “what if something goes wrong?”

Sellers must read:

• default clauses,

• termination rights,

• survival clauses.

Important questions:

• What happens if the buyer defaults?

• Can the seller terminate?

• What obligations survive completion?

• Can claims arise years later?

Many sellers discover too late that:

• warranties survive for years,

• liability is uncapped,

• dispute resolution is expensive.

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Limitation of liability: your safety net

Good agreements include:

• caps on liability,

• time limits for claims,

• minimum claim thresholds.

Without limits, sellers face open-ended exposure.

If the buyer resists limits, ask:

“What risk are you really worried about?”

Negotiation here matters.

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Dispute resolution and governing law

Disputes are:

• slow,

• expensive,

• emotionally draining.

Agreements should clearly state:

• Sri Lankan law applies,

• where disputes are resolved,

• whether courts or arbitration applies.

Unclear dispute clauses create uncertainty and cost.

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Common seller mistakes in Sri Lanka

• Signing without legal advice

• Assuming templates are “standard”

• Focusing only on price

• Accepting buyer-drafted agreements blindly

• Rushing due to exhaustion

• Avoiding uncomfortable questions

These mistakes often cost more than the legal fee you tried to save.

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When sellers must pause and get advice

Always pause if:

• instalments are involved,

• it is a share sale,

• land/buildings are included,

• multiple partners are exiting,

• any clause feels unclear.

If you don’t understand it, don’t sign it.

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Seller pre-signing checklist

Before signing, ask yourself:

• Do I know exactly what I’m selling?

• Do I know exactly when I get paid?

• What can I still be sued for?

• For how long?

• What support am I committing to?

• What happens if the buyer defaults?

If any answer is unclear, slow down.

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Final thoughts

A business sale agreement is not about speed.
It is about closing cleanly.

A good agreement protects:

• your money,

• your reputation,

• your future.

Relief comes from clarity, not from rushing.

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Short practical disclaimer

This article is for general information only and is not legal or tax advice. Always consult a qualified lawyer and/or tax professional before signing any business sale agreement in Sri Lanka.