The Law Offices of Clifton Black represents business owners and entrepreneurs in need of legal assistance for their businesses. Not only do we have years of experience assisting clients in starting or expanding their business, creating business entities such as corporations or limited liability companies, preparing company by-laws or operating agreements, shareholder agreements, company contracts, resolving partnership disputes, drafting and modifying commercial leases, preparing regulated business license applications and more, this law firm has assisted numerous clients in preparing Buy & Sale Agreements for Sellers, Buyer, or both as a transactional attorney, ranging from the sale of small, medium and large privately held companies to all of the business assets of companies.
In 2019, the Law Offices of Clifton Black represented clients in over $10,000,000 of business transactions or business asset sales. Our satisfied clients range from Bar and Restaurant owners, Vehicle Service companies, Employment Agencies, Veterinary Clinics and Marijuana Businesses in Colorado.
Experience matters when purchasing or selling a company. The Law Offices of Clifton Black confidently protects our client’s interest throughout the transaction and approach both the known and unknown issues head on. By quickly identifying high risk liabilities, regulatory violations, overdue taxes, and even weeding out unqualified buyers, our clients rely on the experience that the Law Offices of Clifton Black has developed since 2000.
The information provided herein is not legal advice and does not substitute having legal counsel prepare documents for business transactions. Legal advice comes from an attorney, to a client, has retained that attorney for legal services. Also, the information provided herein is only a partial list of what should be included when buying or selling a business or doing an asset purchase of substantially all of a company’s assets. Every agreement varies based on the transaction, business, assets, nature of the business, negotiations between the parties, and many other factors. Buying or selling a business or buying or selling substantially all of the assets of a business can be a serious legal and financial decision. We strongly encourage anyone electing to do so seek the expertise of an attorney, a CPA, experts in the field, and other professionals that can assist in making a well-informed decision.
Many purchase or sale transactions of companies start with three main documents: a Non-disclosure Agreement (also known as a Confidentiality Agreement), a Letter of Intent (LOI), and the Buy & Sale Agreement, also known as a Purchase Agreement.
Non-Disclosure Agreement, also known as an NDA or Confidentiality Agreement: During the purchase of a business or the purchase of substantially all of a company’s assets, the parties traditionally exchange confidential information. Confidential information from the Seller usually consists of financial documentation, such as a Balance Sheet, Profit & Loss Statement (Income Statement), Cash Flow Statement, and Shareholders’ Equity Statement. Other confidential information may include a client list, supplier list, current leases, company assets, and could even include processes, formulas, recipes, market share, market advantage, and other trade secret information. Confidential Information from the Buyer may include financials, verification of funds, list of investors or lenders, and other confidential information.
The Non-disclosure Agreement will define the type of information that is confidential to the Buyer and Seller. The Non-disclosure Agreement ensures that either party to the transaction agrees to not disclose the confidential information to any third parties.
Letter of Intent, (often referred to as an LOI): Entering into a Letter of Intent typically follows verbal negotiations. The Letter of Intent defines the basic agreement between both parties. The Letter of Intent should discuss basic terms like purchase price, escrow funds – refundable or non-refundable, closing date, payment terms if the transaction is going to be financed by the Seller, timing of application submissions for government regulated businesses, basic assets included, and liabilities the Buyer will acquire, if any.
The benefit of using a Letter of Intent is to ensure that the Buyer and Seller are in agreement as to the basic terms of the transaction prior to having legal counsel draft a Purchase Agreement. The Letter of Intent is generally non-binding, or most of it is non-binding, because the parties are still in preliminary negotiations, likely only discussing the main details like purchase price and assets, thus having the Purchase Agreement cover the terms of the transaction in detail.
The Purchase Agreement: The Purchase Agreement (also known as a Buy & Sale Agreement or an Acquisition Contract) is the most vital document in the purchase of a company or purchase of substantially all of a company’s assets. A well-prepared Purchase Agreement will cover several areas, including, but not limited to:
- Details of the business or asset purchase. Although this seems obvious, sometimes important details of a contract are left out or not well defined. The basic details of a Purchase Agreement should include the purchase price, payment terms, included assets, ownership interest (stock for a corporation or membership interest for a limited liability company), escrow account including whether it is refundable or not refundable, and Closing Date.
Although these details disclosed in the Letter of Intent, most Letters of Intent are non-binding. In addition, as negotiations proceed, some terms may change. Like in any contract, it is better to be clear, otherwise the parties can find themselves in disagreements, arguments and even litigation.
The purchase price needs to be spelled out, including escrow payments, any owner financing including interest rates and penalty for non-payment. If there is owner financing, the Buyer should be executing a separate document, either a promissory note or other loan agreement.
It is important to have a defined Closing Date. If a Closing Date is not defined, a party to the transaction could stall and delay the closing. Sometimes the Closing Date is not a specific date, but occurs after certain activities have occurred. For example, the Closing Date could occur after the Buyer has been approved for a loan, after governmental approval, after a landlord agrees to a new lease or allowing the Buyer to assume an existing lease, after a due diligence period, or other benchmarks or combination of. Also, if the transaction requires applications and approval of government agencies, like in a governmental regulated industry, the parties need to ensure that there are deadlines for application submission and cooperation between the parties in completing any change of ownership applications or other applications, and gathering the necessary documents.
The included assets need to be clearly listed. In many business sale transactions, the Buyer is expecting certain assets to be present after closing, but the Seller may be under the impression that certain assets are not included in the sale. The Agreement should spell out the included assets, including product inventories if any, and even include a list of excluded assets.
- Termination Rights. In some Buy and Sell Agreements, there may be termination rights. For example, if the Agreement provides the Buyer with a right to conduct a due diligence investigation, and the due diligence does not meet standards the parties agreed to, the Buyer may be able to terminate the Agreement. Similarly, if the Buyer or Seller have breached all or part of the Agreement the other party may be able to terminate the Agreement. There could be a situation where the landlord that owns the property where the company is located is not willing to continue leasing the property. The location may be important to the Buyer and not being able to continue in the same location would defeat the Buyer’s purpose. Buying or selling a business may require necessary consents from other parties or owners, or may require approvals or licenses from governmental This section should be well thought out so that a party does not have the ability to terminate merely because they changed their mind, especially when the other party may have gone through a great deal of time and expense preparing for the transaction.
- Assumption of Liabilities: While conducting due diligence, the Seller should disclose, and the Buyer should investigate, what liabilities the selling company may have. Often the selling company is selling the business because it is not profitable. If a company is not profitable, it may be incurring liabilities. If the parties are doing an asset purchase as opposed to a company purchase, most liabilities will not be the Buyer’s responsibility, excluding a fraudulent transfer of assets or liens on the property. The Selling Company could be behind in obligations such as money owed for rents, inventory, payroll, equipment, and other expenses. A Buyer needs to be aware of these to ensure that the purchase does not create a financial obligation for the Buyer or put the assets in jeopardy of being repossessed. For example, if the Buyer intents to operate out of the same location, it is vital to make sure that the rents have been paid and that the landlord is willing to continue renting the premises. Equipment, inventory, raw supplies and other property could have a lien on it that gives a third party or creditor a right to repossess that property. Failure to investigate any liens and/or having a well prepared Purchase Agreement could result in a Buyer losing property it has purchased from the Seller.
- Covenant not to compete: A Covenant not to Compete is an agreement that a person or company will not compete in the industry the business operates in or against a certain company. In a Buy & Sell Contract, the Seller is often prohibited from competing against the company the Buyer is purchasing. If a Seller sold a company, then opened a competing company, the Buyer could be harmed and this would defeat the Buyer’s purpose of buying the business. The Seller would be able to contact its old clients and suppliers and persuade them to do business with the Seller’s new company, taking clients and supplies away from the Buyer. Many states prohibit covenants not to complete as a general rule, but may allow these in certain exceptions like when a Buyer buys a business from a Seller. There may be situations where a Seller is not willing to enter into a covenant not to compete. For example, a Seller may have multiple locations and only selling one location with the intent or remaining in the industry, or may want to have the option to enter back into the industry in the future. Covenants not to compete are often limited to a geographic area and for a certain period of time, and if done correctly may be upheld by a court.
- Due Diligence: The Buyer will want to conduct due diligence to satisfaction of the Buyer or as the parties determine what is reasonable. This generally consists of reviewing the financials of the selling company. Due diligence financial documents will consist of the balance sheet, income statements, statement of cash flows, and tax returns. It is wise to have a CPA or a person with knowledge about these documents review them and make sure that accurate accounting has been conducted, and that they show profits & losses of the company and indications of the value of a company. Due diligence can also consist of looking at the business structure and operations, reviewing contracts, leases, customer and employee information, condition of equipment and premises, and quality of product or services being offered. Purchase Agreements will provide the scope of the due diligence, including what must be disclosed, Seller cooperation, and time limits to terminate the Agreement if the Buyer is not satisfied with the condition of the business after the due diligence period.
- Representations and warranties of the Seller. When selling a business, the Seller is making various representations and warranties to the Purchaser. For example the Seller is indicating that it has the requisite power and authority to sell the business, if a business entity, that the business entity is in good standing, that it owns the assets that are being purchased, that selling the business or assets is not a breach or default of any other agreements, that there are no consents required from third parties or governmental agencies, that there are no pending claims such as lawsuits, judgments or other proceedings, no taxes owed, among other items.
- Representations and warranties of the Buyer. Similar to the Seller making various representations and warranties, the Purchaser is also making representations and warranties unless otherwise disclosed. Like the Seller, the Purchaser is indicating that it has the requisite power and authority to purchase the company, if a business entity, that the business entity is in good standing, that purchasing the business is not a breach or default of other agreements, that there are no consents required from third parties or governmental agencies, no pending claims such as lawsuits, judgments or other proceedings, no taxes owed, among other items.
- Covenants of the Seller. The Seller will also make various covenants (promises) to the Purchaser. This may include an agreement to not seek other buyers, cooperation with the Purchaser regarding access to due diligence documents, continuing to operate the business in the same manner as before without making any material changes, not sway customers away, change terms of employment for employees, no modification of existing contracts or agreements, preserving inventory, among other covenants.
- Covenants of the Buyer. Buyer is also making various promises to the Seller. Buyer is promising to complete the transaction, cooperate in the transaction like completing any necessary documents, applications or forms, work with any landlords where the business is located, not disclose the sale to third parties or employees, not to take any action that would affect the financial ability to purchase the business, among other covenants.
- Conditions of Seller. This section is a requirement by the Seller that the Buyer do or complete certain items in order to close. The Buyer is generally required to abide by the representations and warranties and other agreements in the Purchase Agreement. The Buyer may have to deliver certain certificates and documents necessary to close the deal, resolutions from boards of directors that the transactions is approved, any related transactions have been completed or in process, any third party or governmental consents necessary have been obtained, and of course tender of the purchase price per the Purchase Agreement.
- Conditions of Buyer. Similar to the Seller requiring the Buyer to complete certain items, they Buyer requires the Seller to complete certain items on or before closing. These may include complying with all representations and warranties in the Purchase Agreement, all covenants complied with, deliver of any certificates delivery of the purchased assets, resolution of the board of directors if any, Buyer to be in possession of all necessary permits and licenses, completion of any related transactions, possession of any required third party or government consents, and satisfaction of due diligence items.
- Indemnification of Parties. This section may allow one party to be indemnified (reimbursed, paid back) for any expenses or damages based on the other party’s breach or misrepresentation. For example, if a Buyer has indicated that it has the financial wherewithal to purchase the business, but then has been unable to acquire the necessary funding or approvals, the Seller will have gone through a great deal of time and expense preparing for the transactions. Likewise, if the Seller has breached the Agreement, the Buyer may have expenses that it did not expect. For example, if there are liens on the property, the amount of inventory is less than claimed, or equipment is not as described. In these circumstances the breaching party may have to indemnify the non-breaching party for expenses.
- Closing Adjustments: In some transactions, adjustments to the purchase price may need to be made. For example, if the inventory is more or less than what the parties agreed to, an adjustment can be made at closing to compensate for discrepancies. If certain liabilities or liens have not been satisfied, and those need to be satisfied to close, the parties can make an adjustment to the purchase price so that the transaction can close.
- Letter of Secondment: A letter of Secondment is a letter that allows a company to place some of its employees in another company. In a situation of a company purchase or asset purchase, the Purchaser will place its employees in the facilities of the selling company.
This permits the Buyer or Buyer’s employees to work at the company, generally between execution of a Purchase & Sale Agreement and The Closing. The Buyer will have an opportunity to learn about the selling company, including such things as internal operations, customer base, supplies and venders, gain experience in the particular business, learn the operation and condition of the equipment, view inventories, work with employees, and conduct due diligence. Generally, the Buyer will provide compensation to its employees working at the Seller’s facilities.
The selling company will want to ensure that there are proper direction or limitations for the seconded employees. For example, limiting access to confidential information, excluding confidential information allowed under due diligence, defining the duties of the seconded employees, expectations and other limitations.
- Miscellaneous Provisions. A miscellaneous provision section can be the catch all of other items that do not have a specific provisions. It can include a severability clause, assignment language, specific performance provision, choice of law in case of a dispute, cover payment of costs and expenses, and boiler plate language.
The Purchase Agreement is a very detailed document that will control the business transaction. It is the main document the parties will rely on for completion of the purchase and sale, and the main document the courts will rely on for any disputes. Having a law firm like the Law Offices of Clifton Black on your side is important to protect your interests and be legally protected during the process of either buying a business in Colorado, selling a privately owned Colorado company or buying or selling substantially all of a company’s assets.
