Let the Seller Beware

There might be business deals you can safely write up on a restaurant placemat. The sale of your business isn’t one of them.

Let the Seller Beware

istock photo

There might be business deals you can safely write up on a restaurant placemat. The sale of your business isn’t one of them. Yes, the “keep it simple” principle has its limits. To protect your legal and financial interests, you need to put together a detailed sales contract for you and the buyer to sign.

Here are 10 items to consider including in your sales contract:

1. What the Buyer Is Buying

Usually the buyer will purchase business assets. These typically include the furniture, fixtures and equipment. The assets also might include lease rights, phone numbers, the business name and a catchall called goodwill. While buyers prefer to take assets, if your business is a corporation, there’s another way to go: You can sell the corporate stock. The buyer will then own the corporation, which, in turn, owns the assets. There can be some tax advantages for you if you sell the stock rather than the assets. See your accountant for details.

2. The Buyer’s Investigation

The buyer might want some time after signing the sales contract to further check out the business — for example, looking into financial statements and tax returns. That’s usually no problem. But protect yourself by keeping the checkout period short. Then, if the buyer decides to walk away, you’ll be able to quickly resume marketing of the business. Have the buyer acknowledge in writing that your business information is confidential and won’t be divulged to others without your permission.

3. The Down Payment

Seller financing is common. The buyer makes a down payment and then pays you the balance (with interest) over the next three to five years. The more the buyer has invested in the business, the more likely you’ll get paid on time; the buyer won’t want to lose what’s been invested. So try for a down payment of at least 25 percent. One-third is even better. Of course, before you agree to terms other than 100 percent cash, you’ll want to see the buyer’s financial statement and get a credit report.

4. Security for the Balance

You should retain a security interest in the assets until the full balance is paid. That way, if the buyer gets behind in paying you, you can take back the assets you sold. Another way to protect yourself is to have the buyer’s spouse co-sign for the debt so you can reach their jointly owned assets if the buyer doesn’t pay. If you’re really nervous about being paid – and the buyer is willing – see if you can further protect yourself by having the buyer give you a mortgage or deed of trust on the buyer’s house.

5. Allocation of the Purchase Price

Different assets receive different tax treatment. It will smooth things out with the IRS if you and the buyer agree in the sales contract on how the purchase price will be allocated among the different types of assets. In other words, if you’re selling the business for $500,000, how much of that amount is for equipment? How much for the lease rights? How much for inventory? How much for goodwill? This is another area where your accountant can help.

6. Your Lease

If your lease for business space will last past the sale closing date, see if you can assign the lease to the buyer. You might need the landlord’s permission to do that. Also consider asking your landlord to release you from further responsibility for rent after the buyer takes over. You might want to make the deal contingent on the landlord letting you off the hook for future rent.

7. Warranties

In almost any sales contract, you’ll be asked to make warranties — that is, guarantees that certain facts and statements are true. If it turns out you were wrong, the buyer may sue you or use it as an excuse to make large deductions from what’s owed to you. Read the warranties very carefully. If you’re not absolutely sure of the facts, protect yourself by adding the words “to the best of seller’s knowledge.” That way, if the facts aren’t as you thought they were, you can’t be held responsible.

8. Non-Compete Clause

The buyer won’t want to pay you for a business and then find out you’ve become a competitor. Chances are the buyer will want you to agree not to compete for a certain number of years within a designated geographical area. Make sure the area isn’t too big and that the restrictions are reasonably needed to protect the buyer. You might still need to earn a living in a related field.

9. Prepaid Items

If you’ve paid property taxes or rent in advance, it’s smart to provide that those items will be prorated at the closing. In other words, the buyer will reimburse you for the portion that will benefit the buyer.

10. Liabilities

The buyer will want you to assume liability for debts or other legal obligations (such as an accident claim) that relate to when you owned the business. That’s fair. But it’s also fair for the buyer to assume liability for debts and other legal obligations that come up after closing. Sometimes these matters are handled through clauses using the words “save harmless” or “indemnify.”


Comments on this site are submitted by users and are not endorsed by nor do they reflect the views or opinions of COLE Publishing, Inc. Comments are moderated before being posted.