In business contracts surrounding the purchase or sale of a business, the term “tail” can have different meanings depending on the context. Typically, a seller might run into a tail in their Representation Agreement, and Buyers might be asked to sign an Asset Purchase Agreement with a tail. Here are two common types of “tails”:
A “tail” in a Representation Agreement may refer to a specific period that extends beyond the termination or expiration of the contract. This is often referred to as a “tail period” or “post-termination obligations.” During this tail period, certain terms and conditions of the contract may still be in effect, and the parties may still have responsibilities or restrictions. For example, the seller’s representation agreement might have provisions that any buyer introduced to the business during the term of that agreement would be subject to a 24-month tail. In plain English, should the business broker expose the business to a potential buyer, if that buyer elects not to buy the business during the term of the agreement, the broker is still protected, and due their commission, should the buyer come back after the end of the agreement, and purchase the business.
In the context of financial transactions, such as the sale of a business, a “tail” can also refer to contingent payments that continue even after the deal is closed. As an example, if part of the purchase price is tied to the buyer retaining a key customer or the buyer achieving certain financial milestones like revenues or gross profits, future payments may be structured to continue over a specific timeframe post-closing. This is sometimes known as an “earnout period” or “tail period.”
A “tail” can appear in numerous documents related to the listing, marketing, and purchase of an existing business. And tails can even appear in franchise documents negotiated between the franchisee and the franchisor. As an example, a franchisee might have obligations to continue with their royalty payments, even if they have closed the doors to their franchise.
Tails can serve a meaningful purpose in these types of transactions. But whenever you see a tail, take care to understand the meaning and the potential impact on your specific transaction.
