Monday, December 24, 2012

Business Purchase Agreement Checklist

Business Purchase Agreement Checklist

Basic clauses in LLC, corporation, partnership or sole proprietorship purchase and sale agreements are:

I. Purchasing Assets or Stock? Buyers would normally to just assets only because purchasing stock means the buyer will assume liabilities incurred before the sale.

II. Payment Structure. Subject to financing? Promissory note? What happens in case of default? Down payment? Escrow? Closing date.

III. Seller’s Warranties. At the very least, these should include warranties of:
a. Title (to ensure seller has the right to sell the business)
b. No material omissions
c. Authority to sign the agreement
d. Accuracy of financial statements
e. No new debt pending closing
f. No tax liabilities
g. No existing/pending litigation
h. No conflict with existing leases/contracts. Assignment clauses must be checked in leases and other contracts to ensure they will not become void after the sale of business.

Indemnification clause acts as parties’ “insurance” against the other party’s breach of representations and warranties. Indemnification means the breaching party will have reimburse the innocent party for damages incurred due to the breach.

IV. Non-Compete, Non-Solicitation and Non-circumvention clauses ensure that the seller will not just open another shop across the street and lure ex-employees over. Even jurisdiction like California that do not normally allow non-compete clauses, have exceptions for the sale of business.

V. Offset clause allows buyer to reduce the purchase price or the promissory note by deducting certain amounts such as undisclosed taxes, other debts or failing equipment.

VI. Appendices:
a. Schedule of inventory
b. Schedule of all indebtedness and liabilities
c. Business sale price payment schedule