PURCHASE AND SALE OF A BUSINESS
UNDERSTANDING THE SELLER’S POINT OF VIEW
For many business owners who have spent their lives starting and building up a business, selling it is the means of funding their retirement. Others want to sell in order to finance another business venture or a trip around the world or up Mount Everest. Others have been disappointed in the expectation that a child or other family member would carry on the business. Whatever the seller’s motivation, his goals are to get as much money as possible and retain as little responsibility or liability as possible. These two objectives govern the seller’s decision-making process throughout the transaction.
SALE OF ASSETS OR SHARES? Buyers usually want to purchase the business assets of the seller’s company, rather than corporate stock or LLC membership interests. Assets- only purchase allows the buyer to pick and choose among the seller’s assets, to assume contracts or not, and to substantially limit his assumption of related liabilities. The seller, on the other hand, may prefer to sell the company lock, stock and barrel. That way, the buyer owns the company which in turn continues to own its assets and to be obligated on its liabilities. Usually, however, unless there are other factors such as an exchange of stock, the small business buyer insists on purchasing assets only.
THE PURCHASE AND SALE AGREEMENT(PSA) negotiated by the parties sets forth the terms of the sale, including the basics such as the purchase price and how it will be paid, precisely what the assets being sold are, and the conditions or contingencies that will have to be met before the parties are obligated to close. The PSA also provides the step-by-step “road map” to follow as the parties proceed to closing. Along the way, they will achieve various milestones which may include payment of a deposit, the conduct of buyer’s “due diligence” investigations and inspection of the assets, seller’s verification of the buyer’s finances, consents of any necessary third parties such as a landlord, franchisor, leasor or regulatory agency. The precise requirements will vary depending on the nature of the business being acquired and the particular concerns of the parties. The PSA usually contains a time limit for the accomplishment of each milestone. The time limits help keep things moving along, and also provide the parties ways to terminate the contract if a milestone is not achieved by the required date.
It is in the interest of both buyer and seller to prepare a complete list of the assets to be sold. Equally important is to set forth in the PSA the specific means or document which will convey each asset to the buyer. For example, tangible items are usually conveyed by a bill of sale listing them. Time remaining on a lease is conveyed by an agreement that the seller assigns the lease, the buyer accepts it, and the landlord agrees; the same with an unexpired franchise agreement. Accounts receivable and payable are allocated by agreement. Except for goodwill, each asset to be conveyed should have a corresponding piece of paper representing the transfer of that asset.
POST-CLOSING LIABILITIES are often a bone of contention and their allocation should be carefully spelled out in the PSA. The seller wants to be done with the whole thing and move on. The buyer, on the other hand, wants some assurance that he will not be stuck with unanticipated liabilities. Most of the time, the parties agree that the seller should take responsibility for liabilities arising out of his conduct of the business before the sale, and that the buyer should be responsible for those arising out of his conduct of the business after the sale.
WARNING! Some liabilities are governed by laws which do not permit the parties to completely allocate liabilities. First among these legal regimes are those established by federal and state environmental laws. Anyone buying or selling a business which might involve, or has at any time involved, or in future might involve, contamination, discharges or other environmental damage or potential damage, should consult a lawyer knowledgeable in the area of environmental law. Failure to do so can result in a financial disaster for seller, buyer or both.
INDEMNIFICATION is the means by which the responsibility for liabilities is divided between buyer and seller. They may agree in the PSA that, for example, the seller is responsible for liabilities arising before the closing, and the buyer for those arising after. However, a person who asserts a claim giving rise to a liability is not a party to the PSA, is not bound by it, and doesn’t even know what it says. That person is likely to sue buyer, seller and anyone else who might be remotely related to his complaint, and is unlikely to dismiss his complaint against buyer or seller on the grounds that the PSA assigns responsibility for the complaint to the other party. Instead, the parties agree in the PSA that if, for example, the seller is sued based on something done by the buyer after closing, the buyer will take the responsibility for defending and satisfying the claim – same if the buyer is sued based on seller’s running of the business prior to the sale. Indemnification clause can be lengthy and elaborate or simply stated, but they are crucial to accomplishing the parties’ goal of allocating liabilities.
DISCLAIMER – This article is for general information only and is not intended to provide legal advice or to address specific legal problems. This article does not create an attorney-client relationship. For legal advice concerning business transactions and all other legal matters, consult an attorney.
Selling A Business (Part1)
PURCHASE AND SALE OF A BUSINESS
UNDERSTANDING THE SELLER’S POINT OF VIEW
For many business owners who have spent their lives starting and building up a business, selling it is the means of funding their retirement. Others want to sell in order to finance another business venture or a trip around the world or up Mount Everest. Others have been disappointed in the expectation that a child or other family member would carry on the business. Whatever the seller’s motivation, his goals are to get as much money as possible and retain as little responsibility or liability as possible. These two objectives govern the seller’s decision-making process throughout the transaction.
SALE OF ASSETS OR SHARES? Buyers usually want to purchase the business assets of the seller’s company, rather than corporate stock or LLC membership interests. Assets- only purchase allows the buyer to pick and choose among the seller’s assets, to assume contracts or not, and to substantially limit his assumption of related liabilities. The seller, on the other hand, may prefer to sell the company lock, stock and barrel. That way, the buyer owns the company which in turn continues to own its assets and to be obligated on its liabilities. Usually, however, unless there are other factors such as an exchange of stock, the small business buyer insists on purchasing assets only.
THE PURCHASE AND SALE AGREEMENT(PSA) negotiated by the parties sets forth the terms of the sale, including the basics such as the purchase price and how it will be paid, precisely what the assets being sold are, and the conditions or contingencies that will have to be met before the parties are obligated to close. The PSA also provides the step-by-step “road map” to follow as the parties proceed to closing. Along the way, they will achieve various milestones which may include payment of a deposit, the conduct of buyer’s “due diligence” investigations and inspection of the assets, seller’s verification of the buyer’s finances, consents of any necessary third parties such as a landlord, franchisor, leasor or regulatory agency. The precise requirements will vary depending on the nature of the business being acquired and the particular concerns of the parties. The PSA usually contains a time limit for the accomplishment of each milestone. The time limits help keep things moving along, and also provide the parties ways to terminate the contract if a milestone is not achieved by the required date.
It is in the interest of both buyer and seller to prepare a complete list of the assets to be sold. Equally important is to set forth in the PSA the specific means or document which will convey each asset to the buyer. For example, tangible items are usually conveyed by a bill of sale listing them. Time remaining on a lease is conveyed by an agreement that the seller assigns the lease, the buyer accepts it, and the landlord agrees; the same with an unexpired franchise agreement. Accounts receivable and payable are allocated by agreement. Except for goodwill, each asset to be conveyed should have a corresponding piece of paper representing the transfer of that asset.
POST-CLOSING LIABILITIES are often a bone of contention and their allocation should be carefully spelled out in the PSA. The seller wants to be done with the whole thing and move on. The buyer, on the other hand, wants some assurance that he will not be stuck with unanticipated liabilities. Most of the time, the parties agree that the seller should take responsibility for liabilities arising out of his conduct of the business before the sale, and that the buyer should be responsible for those arising out of his conduct of the business after the sale.
WARNING! Some liabilities are governed by laws which do not permit the parties to completely allocate liabilities. First among these legal regimes are those established by federal and state environmental laws. Anyone buying or selling a business which might involve, or has at any time involved, or in future might involve, contamination, discharges or other environmental damage or potential damage, should consult a lawyer knowledgeable in the area of environmental law. Failure to do so can result in a financial disaster for seller, buyer or both.
INDEMNIFICATION is the means by which the responsibility for liabilities is divided between buyer and seller. They may agree in the PSA that, for example, the seller is responsible for liabilities arising before the closing, and the buyer for those arising after. However, a person who asserts a claim giving rise to a liability is not a party to the PSA, is not bound by it, and doesn’t even know what it says. That person is likely to sue buyer, seller and anyone else who might be remotely related to his complaint, and is unlikely to dismiss his complaint against buyer or seller on the grounds that the PSA assigns responsibility for the complaint to the other party. Instead, the parties agree in the PSA that if, for example, the seller is sued based on something done by the buyer after closing, the buyer will take the responsibility for defending and satisfying the claim – same if the buyer is sued based on seller’s running of the business prior to the sale. Indemnification clause can be lengthy and elaborate or simply stated, but they are crucial to accomplishing the parties’ goal of allocating liabilities.
DISCLAIMER – This article is for general information only and is not intended to provide legal advice or to address specific legal problems. This article does not create an attorney-client relationship. For legal advice concerning business transactions and all other legal matters, consult an attorney.