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Signing a Contract

Contract Provisions

CLIENT FOCUSED APPROACH TO CONTRACTS

Considerations in Contracts for the Purchase and Sale of Your Business

In selling or buying a Business ultimately your agreement will be set forth in writing which will define the relationship between the Buyer and Sellers of a business.  Summit Business Brokers Team Approach is designed to evaluate and prioritize what is important in the sale or purchase of your business. 

Legal Handshake

Purchase and Sale Contracts

Common Elements & Unique Considerations

Purchase and Sale Contracts have many common elements, Price, terms, assets, employment agreements, real estate, earn outs, representations and many other common elements.  However every purchase and sale is unique in many aspects.  What is important in one contract will be less significant in another.  Businesses in the same industry and in the same geographic area can be markedly different from one another in their makeup, structure and history and the Purchase and Sale Agreement must be tailored to those key differences.

Examples of how contracts for similar businesses can be different:

Single Owner                                    Multiple Owners
Asset Sale                                         Purchase of Company 
Cash Purchase                                 Cash with Bank Debt/Seller Financing
Earn Out Provision                           Set Price
Real Estate                                        Leased Property
Tax Considerations of Sellers          Tax Considerations of Buyers

Summit Business Brokers evaluates each purchase and sale agreement based on the unique factors involved in the transaction.  The sale or purchase of your business requires investigation and analysis of the entire business to determine what elements will be key to your decision making and to ensuring that your needs are met. 

Outline of Areas that will be considered during the process of preparing a Contract for the Purchase and Sale of a Business

Business Meeting

Current Ownership of Business

  • Who are the current owners of the Business

  • Single Owner vs. Multiple Owners

  • Do they have the authority to sell the Business

  • What third Party or Outside Approvals may be required

  • Who is negotiating for the Sellers-single person or multiple parties

Business Meeting

Price the Business is being sold for

  • How is the price being determined

  • Multiple of Sales 

  • Gross Sale v. Net Sales

  • Multiple of Earnings

  • Earnings Before Interest Taxes Depreciation Amortization

  • Net Income 

  • Multiple plus Value of Assets being Transferred

Business representative

Earn Out as a Component of Purchase Price

  • Earn Out is additional Consideration to Buyer based

on the Results of the Business for a Specified Period

of Time after the Closing

Example:  $3,000,000 plus 10% of Gross Sales over $900,000 during Year 1 and 5% of Gross Sales over $1,000,00 during year 2

  • Earn out as a Hold back to Purchase Price

  • Earn out as incentive to Performance

Business People

How is the Purchase Price Being Paid

  • Cash at Closing 

  • Cash plus Bank Financing

  • Cash plus Owner Financing

  • Cash plus Earn Out

  • Cash with Hold Back Percentage

  • Stock in acquiring Company

Asset Sale vs. Stock Sale (Purchase of Existing Corporate Entity)

  • Most Purchases are Asset Sales

  • Asset Sale is the Purchase of the Company Assets

  • Accounts, Relationships, Contracts, Real Estate

  • Generally does not include liabilitie

  • More definite cut off of liabilities

  • Purchaser starts a new company

  • Stock Sale is the purchase of the existing entity

  • Purchaser buys the stock of the Seller in existing entity

  • Existing Company Continues in Existence

  • More Complicated Tax Considerations 

  • Liabilities of Existing Company Continue

  • Seller indemnifications more detailed 

Businessman Using Laptop
Contract Signature

What Assets are Being Transferred

  • Real Estate

  • Rights under Leases

  • Customer Contracts

  • Customer Accounts

  • Vendor Contracts

  • Employee Agreements

  • Non Disclosure Agreements

  • Non Compete Agreements

  • Bank Accounts

  • Inventory

  • Accounts Receivable

  • Notes Receivable

  • Permits and Governmental Authorizations

  • Tangible Personal Property  (Office Equipment)

  • Vehicles

  • Insurance Policies

  • Intellectual Property 

                 Patents, Trademarks, Trade Secrets, Customer Lists

  • Franchise Rights

  • Equity Interests 

  • Goodwill of the Company

What Liabilities are Being Assumed

  • Debts

  • Loans

  • Credit Lines

  • Mortgages

  • Customer Accounts (Chargebacks, Indemnifications)

  • Employee Agreements & Contracts

  • Trade Payables and Debts

  • Pension Liabilities

  • Cobra Insurance Liabilities

  • Insurance Contracts

  • Accrued Expenses

  • Employee Benefit Plans

  • Franchise Agreements

Business Meeting

Employee Relations

  • Existing Contracts

  • Union Issues if Applicable

  • Independent Contractors v. Employees

  • Employee Leasing Services

  • Non-Compete & Non Solicitation Agreements

  • Employee Benefit Plans

Seller Transition Agreement

  • Is Seller being retained to effectuate a Transition to Buyer

  • Rights and Responsibilities during Transition

  • Compensation for Transition Period

Insurance Policies

  • Employee Related

  • Health, Workers Compensation, Unemployment

  • Property & Casualty

  • General Liability

  • Claims History

  • Key Man Insurance

  • Errors & Omission Insurance

Prorations at Closing

  • Taxes

  • Rent

  • Salaries & Bonus Plans

  • Utilities

  • Mechanism for settling up

Further Assurance Agreement

  • Matters the parties will work on post closing to effect a smooth transition

Seller Representations

  • Representations to Buyer as to Certain Matters

  • Financial Statements

  • Asset Ownership

  • Liabilities

  • Litigation

  • Undisclosed Liabilities

  • Absence of Changes during Contract Period

Buyer Indemnifications

  • Matters Buyer will Indemnify Seller for Post Closing

Seller Indemnifications

  • Matters Seller will indemnify Buyer for Post Closing

  • Often includes Purchase Price Holdback for period

  • Can include extended coverage Insurance purchased 

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Claims Procedure for Indemnifications

  • Minimum Threshold for Claims

  • Notification Process

  • Who handles Claims  (Buyer or Seller)

  • Set-off Rights (Claims set off against Holdback)

Confidentiality of Agreement 

  • During Due Diligence

  • Process for Due Diligence

  • Control of Notification of Purchase

Dispute Resolution

  • Cooperative between Parties

  • Mediation

  • Arbitration

  • Litigation

Other Considerations

  • Allocation of Purchase Price for Tax Purposes

  • Documents to be Executed by Seller at Closing

  • Documents to be Executed by Buyer at Closing

  • Governing Law

Importance of Contracts

The Purchase and Sale Contract for your Business defines and controls the relationship between the Buyer and the Seller.  Your agreement is what is drafted and signed by the parties, not what is discussed or verbally agreed to.   

 

All contracts of substance will have a provision that the contract, and only the contract, reflects the agreement between the parties and that there are no outside written or verbal agreements between the parties except as set forth in the Agreement.  The contract becomes the definitive agreement between the parties.   Because the agreement is so important, who should draft the Contract?   

 

Generally, contracts for significant purchases will be co-drafted by the Buyer and Seller or deemed co-drafted by the parties.  

 

The Purchase and Sale Agreement will usually contain a provision such as the following:

 

Joint Drafting - No Strict Construction. Each of the parties confirms that it has reviewed, negotiated and adopted this Agreement as the joint agreement and understanding of the parties, and the language used in this Agreement shall be deemed to be the language chosen by the parties thereto to express their mutual intent, and no rule of strict construction shall be applied against any person.  The Contract is deemed to be jointly drafted.   

This provision is required so that one party does not claim any unfair surprise or assert that they just signed the agreement without reading or understanding it.  Without a provision that the contract is co-drafted one side could try and have any ambiguities construed against the party that drafted the Agreement.    

 

Notwithstanding that the Contract will usually be deemed as Co-Drafted between the parties, someone takes the lead.  It can be the Buyer or the Seller that starts the drafting.  At Summit Business Brokers we try to control the process of drafting because in drafting the Contract many times you are able to frame the debate and discussion of what will end up in the final Agreement.   In other words when a provision starts out in an agreement it will often end up in the final version.  In our experience many times a party will just react and respond to what is in the Agreement rather than go through the more difficult process of deciding what should be in the Agreement. 

 

Contracts between parties, in the final analysis, are about Money & Control.  What are the financial provisions, how are those provisions determined, how do they change and how are they enforced.     Each deal will have different pressure points and matters of importance.  Recognizing the key points of a deal and making sure the contract reflects and protects those interests is the focus of our contracting. 

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