Q.  What safeguards should be in a contract to buy a business?

 

A.  There are many items to consider when purchasing a business; the following are some of the standard considerations:

 

1.      INVENTORY:  The offer date to buy the business will be different from the closing date, and thus the inventory of goods will be different.  Contract provisions should state how the price will be adjusted if the inventory changes.  The buyer should consider not accepting an inventory over a certain level.

2.      ACCOUNTS RECEIVABLE:  The contract should state whether the accounts receivable are included in the sale price or whether they are “outside” the offer.  If included, consider a provision for accounts that are uncollectable.

3.      TITLE:  A contract should have a provision stating that the seller has clear title and will transfer assets free of any encumbrances.  A schedule of fixed assets should be attached to the contract.  Buyer and seller should agree on provisions for bulk sales compliance (notification of creditors).

4.      PRORATION:  A partial list of items to prorate at closing are taxes, rents, interest, prepaid service contracts, and burglar alarms.

5.      RESTRICTION COMPETITION:  If buyer wants to restrict seller from operating a similar business, a provision similar to the following should be included in the contract:  “As a portion of the consideration of this sale, Seller agrees to refrain from reestablishing, reopening, or engaging as an individual, partner, employee, or stockholder, directly or indirectly, in a similar trade or business within an area inside a ____ mile radius for a period of ____ years.”

6.      LEASE:  If a lease is to be transferred, a contingent provision should be included in the event there is a problem obtaining the landlord’s consent.

7.      SELLER WARRANTS:  Seller should warrant that all mechanical equipment is operational at the time of closing.

8.      CONSULTING:  If buyer needs seller to remain as a consultant, a provision should state the length of time and compensation agreed to.

9.      FINAL THOUGHT:  Anyone selling a business should consult an attorney and have the attorney prepare the contract.  The fee for such services is a good investment compared to the possible costly errors or oversights that a layperson could make.