Buying/Selling a Business

Buying or selling a business is one of the biggest decisions you may ever make as a business owner. In preparing to buy or sell, you should be sure that you seek assistance and advice from a small business attorney and an accountant. They can work with you in developing a buy/sell agreement that ensures your transaction is legal and binding.

Buy/sell agreements cover these key areas:

• Transfer of assets
• Payments, payment structure and escrow
• Tax filings and payments
• Title transfer
• Licenses and permits
• Financial statement review
• Patents, trademarks and trade names
• Existing leases and other rights
• Insurance policies
• Employees and employment contracts, including benefits
• Supplier, distributor and sales representative relationships
• Litigation claims, actions or investigations against the business
• Condition of inventory, accounts receivable and accounts payable
• Warranties issued to third parties
• Full disclosure of relevant information

Prior to entering any agreement, you should perform a due diligence investigation to confirm that the other party can fulfill their part of the transaction. Due diligence consists of an investigation to ensure that the information being presented is accurate. To conduct a thorough due diligence investigation you will want to seek assistance from a small business lawyer, an accountant and any number of regulatory and management specialists – depending on the type of business being bought or sold.  

Although not necessary, as a buyer, you might want to draw up a letter of intent spelling out in principle the key terms of an eventual purchase and your willingness to negotiate in good faith. A letter of intent is usually sent after the due diligence investigation is complete.

Other considerations a buy-sell agreement may address include:

- Exclude the transfer of certain assets.

- When payments will be made, will they be made through an escrow agreement, will an earnest money down payment be made at an early stage of negotiations.

- The seller will make representations and warranties

• that the organization - corporation, limited liability company, etc. - is in good standing;
• the seller has full authority to make the sale;
• the seller has good title to the assets and properties free of liens and encumbrances;
• leases and other similar rights the seller has from a third-party can be transferred to the buyer;
• similarly all licenses, permits and the like can be transferred to the buyer;
• similarly, approval from government authorities can be obtained;
• the financial statements are true, accurate and perhaps audited;
• the seller has not made any great changes in the business in the recent past affecting the business's value such as purchasing or encumbering assets;
• all patents, trademarks, and trade names are listed and in good order;
• all litigation claims and actions and investigations of potential litigation are listed and disclosed;
• all tax returns have been filed and no outstanding taxes exist or have been temporarily put off and no further tax liability will be incurred before the sale;
• bank accounts, etc. are listed and accounted for;
• all insurance policies and self-insurance practice have been accurately disclosed and all properties and assets are insured and the policies are in effect and will be in effect after transfer;
• all contracts such as employment, order contracts are listed and in effect and will transfer;
• the business enjoys a good working relationship with suppliers, distributors, sales representatives and the like necessary to operate the business;
• similarly, the seller enjoys good relations with customers and seller has not reason to believe that any customer having over a certain percentage of the business will leave;
• the business will list and describe fringe benefit plans employees enjoy;
• the seller will make environmental representations including that it is in compliance with regulations;
• the business is in compliance with all laws and is not subject to any investigation;
• the business has all the needed licenses, permits, and authorizations;
• the inventory is in good saleable condition and is in the amount needed to conduct business;
• the accounts receivable are bona fide and collectable;
• no shortage of any raw material or of any such property exists;
• the sell has fully disclosed all confidential information, such as formulas, used in the business;
• the assets are in good condition;
• the seller will list all warranties it has given to third parties;

- the buyer will make representations and warranties that:

• the buying entity is in good standing;
• the buyer has full authorization to make the purchase;
• the agreement will not be a violation of any other agreement of any law or permit and will not result in the imposition of a lien;
• there is no outstanding litigation affecting the purchase;

- The agreement will normally provide for a period when the investigation of the above matters will occur, that is, the buyer will conduct an independent investigation of the seller's representations and the seller will conduct an independent investigation of the buyer's representation. This investigation is known as due diligence. The agreement will provide for each to have reasonable access to the other's records and property during the investigation.

- Each party will hold in confidence anything it learns during the investigation whether or not the purchase goes through.

- The seller will promise not to undertake any other negotiations to sale the business during this period.

- Many of the representations and warranties made by the seller will end after the buyer has investigated them. Certain ones will survive.

- The seller shall agree to indemnify the buyer if the seller breaches any of the surviving representations and warranties made by the seller.

- The buyer shall agree to indemnify the seller if the buyer breaches any representations and warranties made by the buyer.

- The agreement can be terminated before the closing date under certain conditions or with certain penalties.