Business Acquisitions And Sales
Sellers want a cash transaction. Purchasers want an instalment sale with offsets against unknown factors. Sellers want to give minimal representations and warranties. Purchasers want maximum representations, warranties, and indemnifications. Sellers want no or a limited covenant not to compete. Purchasers want covenants not to compete that provide maximum protection. Once the purchase price has been agreed to, sellers and purchasers often differ on the allocations of the purchase price of the assets purchased since these allocations have different tax consequences to the seller and the purchaser.
Representing purchasers and sellers of businesses requires the understanding of the business. It also requires the understanding of the relationships between the parties which is often opposite of each other.
In addition to the Purchase Agreement, what follows is a list and brief description of some of the additional documents we prepare that are part of the acquisition and sale of a business:
Potential purchasers expect to receive financial information in the form of balance sheets and profit and loss statements. In addition, tax returns and patient, client, and customer lists are often reviewed to evaluate the purchase price of a business acquisition. Confidentiality Agreements are signed to limit the distribution of the potential financial information to third parties other than the purchaser’s attorneys, accountants, and business consultants for their review and evaluation. In addition, patient, client, and customer lists are redacted to maintain the confidentiality of these individuals but still provide information about the patient, client, and customer list to the prospective purchaser.
Covenants Not To Compete
The purpose of the Covenant Not To Compete is to protect the purchaser of a business. It prevents the seller of the business from competing with the purchaser for a specified time period and within a specific geographical area if it is a brick and mortar business. If the business is internet based, the restrictions are often tailored to customer lists.
It includes damage provisions in the event the seller breaches the Covenant and it also provides injunctive relief to prevent the seller from conducting the same type of business within the time period, the geographical area, or the internet restrictions that have been agreed to between the purchaser and the seller.
In the event that the purchase price is not paid in full at closing, the purchaser will sign a Promissory Note which provides for the terms of payment. This will include the length of time to pay the purchase price. It will also specify the interest rate that the purchaser must pay for the installment purchase of the business and an acceleration of the Promissory Note in the event of a breach of payment.
When the purchase price is not paid in full and a Promissory Note is signed, the seller of the business will obtain specific rights to the assets of the business that have been sold. This provides priority of payment over specific business assets which provide the seller with preferences over and above other business creditors. For example, the seller may take a Security Agreement in the accounts receivable and equipment of the business so that in the event of a default the seller has priority over these assets.
Uniform Commercial Code (UCC) Financing Statements
The Purchase Agreement permits the seller to file with the State of Michigan and the local Register of Deeds office documents to put the public on notice that the seller has the above referenced security interest in various business assets. This protects the seller by preventing the purchaser from selling or pledging the business assets until the purchase price is paid in full.
In addition to having the business sign Promissory Notes, Security Agreements, and Uniform Commercial Code Financing Statements, the seller often wants personal assurances that the purchaser will pay the outstanding balance due the seller. This is accomplished by requiring the purchaser to personally promise to pay the remaining balance due on the purchase in the event the business does not pay or the business becomes insolvent or files for bankruptcy protection.