The Business Purchase Agreement: The Importance of a Well Written Document
The business purchase contract must (I repeat, MUST), identify, explain and articulate all or at least most of the important points of the negotiated agreement into a single legal document. Negotiating the details of the transaction is always the first step to a successful business purchase/sale (and the most frequent cause of why a sale/purchase agreement is never reached) but once an agreement is reached and a contract is signed, it is this document that most likely will keep the deal together.
Don’t assume that because you, as the business purchaser have verbally agreed to the contract terms, they will mystically show up in the draft or even the final contract or that somehow the attorney will “just know it”.
Before Signing the Purchase Contract, Here are Some Basic Considerations to Think About
YOUR NJ CONTRACT CHECKLIST
- What is the goal of the contract and the specific purposes to be achieved under the contract? Write them down. Then identify and itemize as many of your terms, conditions and demands as possible so they can be written in the contract.
- Establish the purchase price to be paid for the business and what are the conditions to your performance under the deal. Then set a maximum counter-offer to any quoted price. Do this in the negotiations.
- Establish the terms of any financing, including the amount of any down payment, interest rate, dates for installment payments, length of payment period, prepayments, contingencies for unforeseen defaults.
- Identify and list in writing both foreseeable and/or unanticipated events (COVID comes to mind) that could interfere with your performance and closing of the contract, such as labor shortages, increases in material and other costs (i.e., raw materials, transportation), lack of bank financing, death. Yes, you read death correctly.
- Recite what the economic and/or legal consequences will be to either party should there be a breach of the contract.
When all these issues have been identified, they should be discussed with your attorney to decide if they are important enough to include in your contract. This will protect you from entering into an unfavorable contract. Often a businessman or businesswoman gets himself/herself into a contract and then is unable to get out of it but expects their attorney to do it for them.
However, once a valid written contract is signed by both sides, there is not much an attorney can do to protect you, unless he/she had the opportunity to anticipate the issue, discuss it with you and include the issue(s) in the draft document.
BASIC CONTRACT POINTS TO INCLUDE IN EVERY CONTRACT
1. Asset Purchase Description
The purchase agreement should always be in writing and comprehensively itemize in detail the entirety of the business that is to be sold, including the obvious like the business name, address and the purchase price.
Sometimes rather than trying to list every single asset in the main body of the contract, it is common to incorporate by reference a more detailed itemization of the assets in what is called a “contract addendum” or “schedule”. If the schedule does not completely agree with the negotiated terms, it will need to be amended before signing.
If the business has multiple locations, the buyer must make sure that all locations are included in the contract. On the other hand, if the business leases space, the agreement must address the lease details and require an assignment of the lease from the landlord to the new owner.
2. Purchase Price
The purchase price is the purchase price, right? Although what I just said seems reasonable and the agreed upon price should be the easiest clause to put into the purchase contract, this is not always the case. The purchase price should fully describe any of the items of value included in the price because the values assigned in the contract will reappear at final closing.
This means you should itemize the assets of the business down into categories such as “Inventory,” “Real Estate,” “Equipment”, etc. It is the responsibility of both the buyer and the seller to the transaction to make sure each category is given a value that is complete, accurate and itemized.
The reason why it is necessary to break the price down into categories and values is because of the IRS. The purchase agreement needs to describe not only the current value of the assets, but also the kinds of adjustments that will be made before it is a done deal.
3. Payment Method(s)
After the terms and conditions of the purchase price have been described, the payment method and timing of payment must be set forth. The buyer must clearly identify the method of payment and the timing of the payment(s).
Sellers and buyers must both look at the schedule and timing of payment(s) including any escrow provisions prior to signing the contract and again, prior to final closing. If seller financing is part of the agreement, the payment schedule should describe what collateral is being pledged to secure payment plus the interest rates on the amount being borrowed. This can become a sticking point if the seller expects to hold a first position on collateral for assets that will be held as security.
4. Seller Warranties and Responsibilities
When a business is sold, a seller generally makes certain promises to the buyer. These promises are known as warranties. Warranties are a means of protecting a buyer against hidden threats or liabilities that devalue a business or its assets. Since most buyers are not aware of standard warranties in a business sale and purchase, it is important to have an attorney give the warranty protections close attention and detail in the contract.
Sellers often have affirmative contract obligations to the purchase that must be taken care of before final closing, many of which relate to pre-closing business operations. Buyers should require assurances that the business they are buying today is everything they have been told to be true.
5. A Non-Compete Clause and Dispute Arbitration / Mediation Provisions
Two other details worth noting are non-compete clauses and provisions for dispute arbitration. The value of a business can be seriously reduced if the seller can start up a similar business and take his customers back with him or her. Non-compete clauses prohibit sellers from engaging in a similar business for a specified period of time – usually three to five years, and within a specific geographic region. To learn more about covenants not to compete in NJ, please visit our Covenant Not to Compete page.
Arbitration or mediation provisions are another important consideration to include in the purchase contract. These provisions provide that if either the buyer or the seller violate(s) aspects of the purchase agreement (known generally as a breach of contract) prior or after closing, the dispute must go to mediation or arbitration. An arbitrator can potentially salvage the deal by resolving the disagreement and holding both parties accountable for their responsibilities. To learn more about the ins and outs of arbitration and mediation, visit our NJ Arbitration Law page.
Fredrick P. Niemann Esq.
A full legal review of the purchase agreement is an absolute must. An experienced NJ business attorney deals with fine print every day and is trained to protect their clients’ best interests. They can also help the buyer draft back out clauses to purchase the business after it has been signed, which is a critical step because it effectively takes the business off the market while the buyer waits for the deal to be finalized. Additionally, the services of an accountant can also be extremely helpful during the purchase process for helping the buyer ensure they are properly understanding the value of the business they are about to purchase.
Do you have additional questions regarding a prospective business purchase that requires the preparation of a contract in NJ? You can call Fred Niemann toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com to schedule a low cost and convenient consultation.