Selling a business can be a stressful event and there is a lot of negotiation that goes into it. For purposes of this post, we will focus on negotiation of an asset purchase agreement, where the business sells most, or all, of its assets to a purchaser. There are many important provisions in an asset purchase agreement, but we will focus here on a few that we believe are the most important.
Purchase Price and Allocation
What will the purchase price be based upon and what will the allocation be? If a client is selling a business that has tangible assets, such as equipment, furniture, and a storefront with materials, a value should be placed on it. This can be done, for example, by obtaining a business valuation. This will be important for tax purposes. Other line items in the allocation include the good will of the business, as well as any non-compete clause. If a business has been in business for many years, and has built a good reputation with a customer base, the good will is going to be higher. We always counsel clients to work with their accountant to determine what breakdown will work best for their particular circumstances and will negotiate with either the buyer or seller, depending on which side of the transaction we are on, to find a breakdown that works best for everyone.
Non-Compete Clause
As a buyer, if you are purchasing a business, you do not want the seller to turn around and open up a competing business down the street. To protect against this, an asset purchase agreement should have a non-compete clause. There is much greater leeway in terms of the scope of a non-compete clause in an asset purchase agreement as opposed to an employment agreement. The purpose of the clause is different in each of those scenarios. With respect to the sale of a business, the purpose is to protect the purchaser, not to restrict the future employment of the seller. Therefore, a longer duration, such as 3-5 years, would be reasonable. Such a duration in the employment context, at least in New York, would not be enforceable.
Liabilities
What liabilities will the purchaser be assuming, if any? The liabilities that purchaser will be assuming should be detailed either within the agreement, or in an exhibit, so that it is clear. Towards this end, if the seller has a lease agreement for the premises in which the business is located, an assignment and release should be negotiated. If a principal of the seller has signed a personal guarantee of the lease agreement, both seller, and the guarantor, should be released from any liability under the lease agreement once it is assigned.
Taxes
Taxes that may result from the sale of the business are an important issue for any seller. The taxes, as well as the parties responsible for paying those taxes, should be detailed in the agreement. Each state has different tax laws that the parties should be aware of which is why we always recommend, again, that a client consult with their accountant to determine what their potential tax liabilities are. In New Jersey, for example, there is a Bulk Sales Tax, that the sale might fall under. It’s important to understand what the requirements are that must be met by both buyer and seller under any federal and state tax laws.
The foregoing are just a few of the important issues that must be taken into consideration when negotiating an asset purchase agreement. Although there is, of course, a cost to working with an attorney, and an accountant, to bring the sale of a business to a close (on the buyer and seller’s side), we believe it is worth it to protect yourself and your business.
Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.
