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Buy-Sell a Business
All such transactions - no matter how small or large - should be done
through a buy-sell agreement. The cost of preparing such an agreement
varies with the complexity and size of the business being sold and the
amount of effort the buyer wants to put into investigating the business
to make certain the business is as the seller represented. An accountant
or financial analyst can be very important not only in investigating the
business's financials, and the buyers ability to pay, but also in evaluating
the value of competing or alternative offers.
The main question is whether the sale will be an asset purchase or a stock
purchase. Most are asset purchases. The buyer especially will usually
prefer an asset purchase since he is then not likely to be found to have
assumed the outstanding liabilities of the business. Also, an asset purchase
often results in better tax treatment for the buyer. The seller often
prefers a stock purchase because then he will be subject to the more favorable
capital gains tax and will be able to free himself of any outstanding
liabilities the business may have. Under the bulk transfer provisions
of the uniform commercial code, it is in the seller's interest to give
public notice of the sale so that any outstanding liabilities are transferred
to the buyer.
Tax considerations figure prominently in negotiating how to structure
the payment, as we already have begun to see. The buyer will often prefer
that a large percentage of the price be designated as payment for covenants
not to compete; the seller usually will not since it is considered ordinary
income to him. Both parties usually prefer to designate a large amount
of the purchase price as payment for good will; this also helps to facilitate
financing for the buyer. Sometime a portion of the purchase price can
be paid as consulting fees, royalty payments, etc. especially if the seller
is not particularly interested in receiving all of the purchase price
at one time.
Please prefer to the covenants not to compete page for further comments
on such a provision. In the business buy-sell context, it is best to write
such provisions into the buy-sell agreement itself as a mechanism for
protecting the good will being transferred; courts look much more favorably
on such provisions when written in this manner.
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.
Letter
of Intent
Due
Diligence
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