Part 1 here, Part 2 here, Part 3 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
The seller should agree not to compete with you and your new business after the purchase has gone through.
Posted by: Geoffrey | March 06, 2011 at 10:03 PM