So you have decided to take the plunge and buy a business. Congratulations on this major and exciting decision! You may be doing it alone or you may have one or more partners. You may be using your own funds or using some sort of financing. Before you actually get into the nitty gritty aspects of taking over and running the actual business, many moving parts have to be considered, organized and addressed. In most cases, the purchase contract or agreement is the operative document that spells out the details of the transaction and the rights and responsibilities of the buyer and the seller. For example, a purchase contract may contain certain contingencies (conditions) that must be met before a transaction will actually be consummated. These contingencies can include a buyer’s ability to secure financing, a satisfactory period of due diligence (a buyer’s review of the business operations) based on predetermined parameters, among other conditions. Or, a purchase contract can be an unequivocal obligation on the part of buyer to purchase the business and on the part of seller to sell the business and to consummate the transaction.
The purchase contract must also contain other critical terms that will control the course of dealings between buyer and seller. Specifically, a purchase contract must clearly indicate the point in time in which a seller will no longer be liable for the operations of the business, including liabilities and other obligations. Once the liabilities are clearly accounted for, one of the most critical concepts that a purchase contract must address is indemnification obligations. Practically speaking this means that the seller is responsible and should indemnify and protect the buyer for all liabilities or losses that occur prior to the consummation of the transfer of the business and the buyer should indemnify and protect the seller from all liabilities or losses that occur following the consummation of the transfer of the business. Delineating the liabilities between buyer and seller goes hand in hand with the determination of the point in time when the seller ceases to have rights to receivables or revenues generated from the business and the buyer’s rights to these funds.
Some transactions involve lease agreements and discussions with a landlord. If a business is operated out of a particular location, a buyer needs to be comfortable that the lease and/or underlying arrangement is in place so that buyer can continue operating the business. Accordingly, additional discussions with landlord are usually taking place contemporaneously with the negotiation of the purchase contract. In some cases a lease may be assigned to buyer and in other cases a landlord may give buyer a new lease. The terms of any lease, whether an assignment of the old lease or a new lease, must be carefully reviewed, negotiated and discussed. The underlying lease transaction must be memorialized in the purchase contract; for example, a buyer obtaining a lease assignment or a suitable lease may be another condition to the sale.
Another important concept that should be contained in a proper purchase contract is the respective representations and warranties of each party. For instance, the seller should be able to tell the buyer certain basic facts and make disclosures about the business and its performance, the existence of lawsuits or threats made against the business or its owners; the seller should state with certainty the full identity and ownership interest of the owners of the business and whether the assets of the business are owned free and clear of any liens or encumbrances; additional representations by a seller can include information regarding the business’ performance and operations such as receivables, revenues, client or customer lists and the like; relevant information about employees and the workforce that is critical to the business.
From a buyer’s perspective, the seller may also request that the buyer make some representations and warranties. Specifically, a seller may want to know the identity of the principals and owners of the buyer and whether they have the requisite power and authority to enter into and consummate the transaction. Some sellers may want to know that the buyer is financially solid and able to consummate the transaction. If the business is a professional enterprise such as a medical/dental practice or other business that requires certain licenses and/or credentials, a savvy seller would require a confirmation from buyer that buyer is indeed qualified to own and operate the business.
Another important issue that must be addressed in a proper purchase contract is whether the seller should be bound by any restrictive covenants following the transfer. A buyer needs to be comfortable that upon making a significant investment of time, money and effort, a seller will not turn around and set up a competing business using the know-how and confidential information of the business that has been transferred. In general, in order for a restrictive covenant to be enforceable, it should contain reasonable limitations of time, location and scope.
There are of course other provisions that a purchase agreement could contain that may be relevant in a particular set of circumstances. It is critical that a purchase agreement is properly drafted to cover issues that are relevant for the parties in the circumstance and thoroughly negotiated to ensure an end result that is mutually satisfactory and maps out a successful purchase and sale and amicable relations between the parties. Working with an attorney that is experienced and knowledgeable in handling purchases and sales of businesses will set the tone for a successful transaction and enable a smooth transition and strong start going forward.