BlogBuying a BusinessBuying a Business: Some Contract Review Tips

December 8, 2021by Jeffrey Davis

When putting together this e-book, it occurred to me I had an opportunity to give clients, and perhaps other attorneys some insight into my contract review process whether it be a stock purchase agreement or an asset purchase agreement.

First thing I do when reviewing or preparing any purchase agreement is confirm the assets being purchased, is there a detailed list of the assets being acquired? I cannot stress this point enough. I’ve litigated too many claims where the parties did not outline the assets being purchased and it invariably becomes an issue for litigation that ends up costing the client thousands of dollars. Dollars which could have easily been avoided. If you are purchasing equipment (whether it’s a stock purchase or asset purchase) then list out the equipment. If you are purchasing a client list (or if that’s critical to the deal for you), then please, for everyone’s protection and in order to minimize the risk of litigation, provide copies of the client lists as an exhibit to the purchase agreement.  On the flip-side of the deal, as the seller, if there are any assets that are not included in the purchase, then state what those specific assets are to avoid any confusion down the line.

Second, if liabilities are being assumed, then state what those liabilities are. For instance, if the purchaser is assuming a debt, a mortgage or any other liability whatsoever, then the purchase agreement should reference those specific liabilities. This includes the assumption/assignment of any lease.

Third, I want to confirm the purchase price, how the purchase price will be paid, and what additional consideration (money, services, etc.) or other assurances were negotiated with respect to ensuring the payment of the business. Those need to be clearly stated in the purchase agreement. All to often I have someone call me with this story: “I sold my business the purchaser made one payment and now they aren’t making any more payments”. What guarantees do you have in the purchase agreement to ensure you get paid? If the purchaser defaults, then what? Do you get the business back? Will any individual be personally guaranteeing the payments? Will you have a security interest in any of the assets?

Fourth, if the purchase agreement being finalized is contingent upon some other event from occurring, then these “contingencies” as they are called should be clearly set forth in the purchase agreement. For example, a lease assignment contingency means that the agreement is contingent upon the landlord approving of the purchaser for the purposes of assigning a lease. A liquor license contingency means that the agreement is contingent upon obtaining a liquor license.

Fifth, you may want to consider well drafted restrictive covenants such as non-compete agreements or non-solicitation agreements. The point is, when you’re purchasing a business you want to ensure that the goodwill you’re purchasing remains well protected from the sellers or any key employees. Specifically, you want to make sure that when you’re purchasing a business the seller doesn’t open up a competing business down the street and steal all the clients you purchased. You want to make sure the key employees are staying with the business. Restrictive covenants like non compete agreements and non-solicitation agreements help to protect your business in those types of circumstances. An alternative to that is offering better compensation or even a small percentage of the business you’re purchasing to keep the sellers or key employees tied to the business i.e. legally unable to do things that could damage the goodwill of the business.

Sixth, tax allocation considerations: We’re going to discuss this in a separate post.

Finally, I like to ensure that any reasonable or specific representations of the seller are clearly included in the purchase agreement. This might be representations about the conditions of the assets, continued operation of the company being purchased, or even specific financial representations. The types of representations you want to include might vary from deal to deal but for the most part you’re looking to narrow down future risks to the business as much as possible, by holding the seller specifically accountable for any intentional misrepresentations.

Are you buying a business? Contact Us today for a free consultation.

© 2021 Jeffrey Davis

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