Five Steps to Buying a Small Business in New York – Part 4: Documenting the Deal

Httpwwwflickrcomphotospedrosimoes7129049See Part 1 here; Part 2 here; Part 3 here; Part 4 here; Part 5 here;

The purchase of a small business requires many legal agreements and documents to effect the transaction.  Obviously, you need an experienced attorney to draft and/or review all of these documents and explain their significance to you.

While you were the one to negotiate and reach an agreement on the business terms with the seller, it is your attorney’s job to document such a deal. In addition, he or she should advise you of legal issues and devise agreement provisions that protect you from any problems that may have surfaced during the due diligence and negotiation processes.

I am sure that you have heard the notion that attorneys can be deal-breakers. While attorneys have to be cautious and warn you of pitfalls in the transaction – which is why you might perceive them as deal-breakers – they should not advise you on the purely business issues of the transaction. A good attorney advises you about potential risks and gives you strategies to minimize those risks, but allows you to go forward with the transaction if that is the informed decision you have made.

What are the documents likely to be encountered in a typical small business asset purchase?

Usually, there will be a sales agreement, documents relating to the
financing of the purchase price, documents relating to the transfer
of the assets, and corporate documents authorizing the transaction.


Sales Agreement

The sales agreement (also known as the acquisition agreement or
purchase agreement) is the most important document in the transaction.
The sales agreement sets forth all of the major terms and conditions of
the transaction and is often executed by the parties days or even weeks before
the closing.

The sales agreement usually has provisions dealing with:

1.    The assets being sold

If you are not buying all of the assets of the business, an attachment
to the agreement should specifically list all assets included in the
purchase.

2.    The purchase price and terms of payment

An often-overlooked term is the “allocation of purchase price.” The
allocation of the purchase price to the different types of assets has
consequences for your, and the seller’s, future tax bills.

3.    The liabilities assumed by the buyer

In an asset sale, liabilities are generally not transferred unless the
buyer specifically assumes them. In New York, however, be aware that in
a purchase of all of the assets of a business, the buyer can be made
liable for unpaid sales tax due from the seller.  (For more information,
see New York State Tax publication 20 on page 33).

4.    The representations made by the buyer and the seller

The seller should stand behind all promises made and facts represented in the course of the
negotiation by expressly representing such promises and facts in the sales
agreement. If it turns out later that the seller made
misrepresentations, you may be entitled to damages.

5.    The covenant not to compete

The seller should agree not to compete with you and your new business after the purchase has gone through.

6.    Contingencies

As an example, if you need the landlord’s consent to buy the lease of the business,
the agreement should be made contingent upon the receipt of such
consent. In other words, if the seller fails to obtain consent, you can
walk away from the deal.

7.    Indemnification

The seller should indemnify you for all claims resulting from the
operation of the business before closing and for any breach under the
sales agreement, such as a breach of the representations made in the
sales agreement.


Documents Relating to the Financing of the Purchase Price

If the seller finances the purchase price for you by allowing you to
pay in installments, he or she will most likely require the following
documents:

1.  Promissory Note

The promissory note sets forth the purchase price owed, the dates for
the remaining payments, interest on any outstanding payments, and any
other terms of payment you agreed with the seller. The promissory note
makes it easier for the seller to collect from you if you default on
payment.

2.  Security Agreement

The seller may ask for security interest in the assets being sold to
you. By doing so, the seller may foreclose on the business assets in
case you default on payment. The security agreement creates the
security interest and sets forth the terms applying to such a security
interest.

3.  Guaranty

If the buyer is a corporation or a limited liability company, the
seller may ask you to personally guarantee payment of the purchase
price.

4.  UCC Statements

While the security agreement creates the security interest in the
business assets in favor of the seller, the seller will want to make
sure that such a security interest is also properly recorded
(“perfected”) by filing the necessary documents with the appropriate
New York filing office.  A proper recording protects the seller from other creditors who may claim rights in the business assets.


Documents Relating to the Transfer of the Assets

1.  Bill of Sale

The bill of sale transfers ownership of all of the tangible assets of
the business from the seller to the buyer. Tangible assets are
furniture, supplies, inventory, equipment, and the like.

2.  Contract Assignments

If the assets you are buying include contracts, licenses, and permits,
these documents will assign all of the rights and obligations of such
contracts, licenses, and permits from the seller to the buyer. Be
careful, though, to ensure that all licenses and permits are freely
assignable to you. Assignability of licenses and permits must be
investigated in each case and is highly dependent on local laws and
regulations. Similarly, contracts may contain provisions that require
the consent of any non-selling party to the contract or that prohibit
their assignment altogether.

3.  Documents Transferring Trade Names, Intellectual Property, Phone Numbers, and Other Intangible Property

If the assets you are buying include intangible property such as trade names, trade marks, copyrights and so forth, there will be documentation transferring ownership of such property to you.

Corporate Documents

If the buyer and or the seller are officially “entities” (i.e., a
limited liability company or a corporation), both parties have to
execute the appropriate corporate consents to the transaction. This
could be in the form of a shareholders’ consent, directors’ consent, or
members’ consent. In addition, you will want to see the corporate
authorization of the person executing all legal documents on behalf of
the seller.

If you need help with buying or selling a small business in New York, contact a licensed small business attorney in your area.

Picture courtesy of Pedrosimoes7 protected under Creative Commons Lincense Attribution 2.0

About Imke Ratschko


Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027.

One comment

  1. The seller should agree not to compete with you and your new business after the purchase has gone through.

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