So you’ve got your eye on buying a business. Or you’re ready to sell your own company to someone else. Whichever side you’re on, buyer and seller are both on board and ready to move forward with the sale. You’ve even drafted a Letter of Intent to demonstrate that you’re serious about the business purchase transaction.
An LOI is a great place to start the process of selling or buying a business. But it’s far from the only document you’ll need to finalize the sale.
You must make sure to cross your t’s and dot your i’s in a business sale. The process of transferring ownership will go much smoother if you cover all your bases.
But what documents do you need?
Your needs will change depending on your industry and the particulars of the business for sale. The best way to make sure you’ve addressed all your issues is to speak to a local Philadelphia business attorney who can help you with your unique transaction.
At Holmes Business Law, our legal team knows what it’s like to be a small business owner because we’ve been through it ourselves. Our lawyers can help you complete the legal documents you need to buy or sell a business. Call our Philadelphia offices today at 215-482-0285 to talk to our expert counsel about your business purchase transaction.
Restrictive Covenant Clauses
Restrictive covenants are contractual clauses that detail what a party may not do once a business has been sold. Restrictive covenant clauses often protect the buyer after the sale by ensuring the seller doesn’t do anything to lower the value of the company.
- Covenants not to compete stop the seller from either opening a new competing business or working for a competitor after the sale.
- Non-solicitation clauses stop sellers from soliciting, recruiting, or poaching clients or employees from the business once the sale has gone through.
- Confidentiality and non-disclosure clauses protect both the buyer and the seller and are often agreed upon early on in the business purchase process. The buyer is legally bound not to disclose the business’s finances or trade secrets during and after the negotiation process, even if the sale ultimately doesn’t go through. Meanwhile, the seller is legally bound not to disclose the same information after the sale is complete.
Restrictive covenants put legally enforceable limits on what you can and cannot do before and after the business purchase transaction.
When negotiating restrictive covenant clauses, you want to make sure you have proper legal representation. Otherwise, you may sign away your rights in a way that disadvantages you.
Assignment and Assumption Agreements
What happens to a business’s debts and obligations after a sale?
The answer depends on the terms of your sales contract.
When a buyer takes on a company’s debts after a sale, they are assuming those debts. Whoever assumes the debt becomes responsible for paying it after the sale is complete.
If the company has any vendor contracts or agreements, those contracts can be assigned from the seller to the buyer. Once a contract is assigned to the buyer, they take on the seller’s responsibility to deliver on its terms.
Assignments and assumptions are also called contractual liabilities. By signing the contract, the buyer takes on the liabilities and becomes responsible for any losses or bills after the sale.
The buyer and seller must agree on how to split any assets, liabilities, or lease terms. Your business purchase agreement should include details on what will happen to:
- Any outstanding loans owed by the business,
- Any unpaid vendor invoices or accounts payable balances, and
- The business’s mortgage, lease, or rent payments.
For example: If you’re a buyer who assumes the payments on a lease, you want to make sure that you also have the lease transferred – or assigned – to your name.
The attorneys at Holmes Business Law can help you draft your business purchase agreement in a way that protects against complications like this down the line.
Asset Sales Agreements
In addition to assigning liability and contractual responsibility, your business purchase agreement must also include sales agreements for each asset included in the sale.
Business purchase transactions can split assets in a number of different ways, such as:
- Buying a business and all of its assets in their entirety
- Buying a business and only some of its assets, while the seller keeps the rest
- A sale of some or all of the business assets only, not the business itself
You’ll need different agreements drafted up depending on what kind of business sale you’re looking to make. In order to be thorough, you should go over every asset owned by the business, tangible and intangible. That could cover:
- Inventory, tools, or machinery
- Real estate, vehicles, or lease agreements
- Office furniture, laptops, computers, or any other infrastructure
- Intellectual property such as trademarks, copyrights, and patents
Your sales contract should cover the terms and conditions for the assets being sold, including any liabilities the buyer should know about. You should also specify which assets the seller will keep after the sale – if they’re going to keep any.
Sales agreements can get complex, especially when it comes to appraising the value of assets. Some assets need additional paperwork to be legally transferred to another party, such as trademarks and patents. Our legal team can help you document all of a company’s assets, draft up the proper terms for their sale, and fill out the extra forms you need to submit.
Consultation or Employment Agreement
Sometimes, the buyer of a business wants the seller to stay on board as a consultant or employee after the sale. This makes sense, as the seller is often more familiar with the day-to-day management of the company than the buyer. Especially at the beginning, it can help to have their guidance and experience in continuing the company’s operations.
Whether you’re the buyer or seller, It’s important to get the terms of the employment agreement right. Both parties rely on each other to provide value after the sale – for the seller, they expect to get paid for their employment. For the buyer, they expect to have the seller’s expertise as a resource in running the company in a profitable way.
The experienced attorneys at Holmes Business Law can help you negotiate your expectations into contract terms. Call us now at 215-482-0285 to get started.