ABA Family Legal Guide

Forming and Operating a Small Business

Franchising and Buying a Business

Buying a Business

What is in the contract?

The contract for purchase or sale of a business is absolutely central to the transaction. Like a contract to sell a home, it will determine the basis upon which the business is sold.

What, Exactly, Are You Buying?

The structure of the contract will depend upon whether you're purchasing specific assets of the business or the entity conducting the business. If you're buying assets, they should be specified, along with any liabilities of the business you've agreed to pick up. If it's an entity purchase, the contract should specify that you will not assume any undisclosed liabilities. This is usually accomplished by a warranty from the seller to the buyer, which essentially gives you the legal right to come after the seller should an undisclosed claim against the business surface.

Defining what is actually being purchased is frequently accomplished by attaching detailed schedules to the contract that specifically identify the assets and liabilities, or specifically define the balance sheet of the entity, so that the exact nature of what constitutes the business and what is being transferred can be identified, item by item.

Contingencies

If you haven't been able to investigate the purchase fully before preparing the contract, the contract might provide that it is contingent on certain factors (i.e., that facts about the business as asserted by the seller can be verified). That way, you can have an additional period to investigate without irreversibly committing yourself.

Access to the Business

If there will be a period between the execution of the contract and the closing (interim period), the contract can specify that you will be allowed to come onto the business premises, access business records, and otherwise be informed about the nature of the business.

Cash

Generally, don't look to get an infusion of cash from the sale. Cash normally is not transferred. In an entity purchase, cash accounts usually will have minimal balances. In an asset purchase, cash accounts normally will not be transferred. Accounts receivable usually will be treated similarly to cash except where collection of an account receivable is linked to future performance.

Noncompete Agreements

The last thing you want is to buy a business and have the old owner pop up a few months later as a competitor. That's why you'll want the seller to provide you with an assurance that after the sale of the business, he or she will not compete or remove personnel from the business. Sometimes these agreements are included in the sales contract (where they become part of the intangible assets you acquire), and sometimes they are handled in a separate document.

Either way, you have to make sure that the courts will enforce the agreement. In general, that means it must be reasonable both in terms of duration (how long it will last) and geographic area (what region it will cover). What is "reasonable" for such agreements? In many states, a period of two or three years is an outer time limit. Geographic restraints will, of course, vary depending on circumstances. Fifty miles might be reasonable in a very sparsely settled region, but twenty-five miles might be too many in the heart of a huge metropolitan region. Have your lawyer look into the statutes and cases in your state and any other state that may have jurisdiction to get an idea of what might be reasonable in the circumstances.