Purchase and Sale of Business FAQ - United States

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A Purchase and Sale of Business Agreement is used to transfer the shares or assets of a business from one or more sellers to one or more purchasers. The agreement can be structured as a sale of the shares of the business or as a sale of the assets of the business.

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Sale of Business(Assets) vs Sale of Business(Shares)

What is the difference between a Sale of Business(Assets) and a Sale of Business(Shares)?

In a Sale of Business (Shares) a business that is incorporated can be sold by selling all issued shares of the Company. In this case the corporation and all its assets, rights and obligations would transfer from the seller to the purchaser. In a Sale of Business (Assets) the business entity (corporation, partnership, etc.) remains with the sellers and only the assets of the business (equipment, buildings, client lists, etc) will be transferred to the purchaser.


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Sale of Business Assets

What is a sale of business assets document?

In a Sale of Business (Assets) the business entity (corporation, partnership, etc.) remains with the sellers and only the assets of the business (equipment, buildings, client lists, etc) will be transferred to the purchaser.

Will this agreement work where only the assets of a business are to be transferred?

Yes. The agreement can be structured as a sale of the shares of the business or as a sale of the assets of the business. In a sale of the assets the original business structure and ownership would remain intact however title to assets such as equipment, inventory, goodwill, and business contracts would transfer to the new purchaser.

Why does asset price need to be allocated?

The assets to be included in the purchase of a business should be specified to ensure that there are no misunderstandings regarding what is to be included or not included in the sale. In addition, by allocating a portion of the selling price to each asset, the fairness of the total asset price is more easily determined.

What does the Equipment asset include?

The equipment assets would include fixed and moveable machinery such as cars, trucks, lathes, computers and other similar pieces of equipment required for the business to continue to function normally after the closing date.

What does the Inventory asset include?

The inventory assets would include raw materials, work in progress and finished product available for sale. In some cases, a purchaser may wish to exclude obsolete inventory no longer suitable for sale or for use in production. Obsolete inventory of this nature should be identified explicitly under the Excluded Assets section.

What does the "Sales Orders Confirmed but Not Shipped" asset include?

Sales orders confirmed but not shipped prior to the closing date would require goods and inventory from the post-closing inventory. As a result revenues from these sales would typically go to the purchaser and should not be included in the accounts receivable of the seller.

What does the Business Contracts asset include?

Business contracts such as sales contracts related to the core activity of the business would typically transfer to the purchaser after closing. Business contracts such as partnerships in related ventures may or may not be included in the sale of business. Those partnership or venture contracts may prohibit the transfer of a partner's interest to an outside party.

What does the Books, Records, and Files asset include?

Books, records and files of the business will include all the information required for a smooth transition in ownership and for the business to continue normal operations after the closing date. This includes all accounting files of the business and also includes marketing information such as client lists and market research information and all files related to product research and development as well as production and maintenance history. Note that a copy of accounts receivable up to the closing date may be retained by the seller to facilitate collection of outstanding accounts.

What does the Trademarks asset include?

The trademarks asset would include all ownership rights to existing copyrights, trade-names and trademarks as well as all rights to all current research not yet trademarked. This will allow the purchaser to carry on normal business operations after the closing date. Alternatively, the seller may grant only a license for use of existing trademarks. This should be agreed to by all parties and explicitly stated in the additional clauses.


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Sale of Business Shares

What is a sale of business shares document?

You can sell a business that is incorporated by selling all issued shares of the Company. In this case the corporation and all its assets, rights and obligations would transfer from the seller to the purchaser. Any rights or liabilities are attached to the corporation and would transfer with the corporation.

What is the difference between a Purchase and Sale of Business(Shares) document and a Share Purchase Agreement

A Purchase and Sale of Business(Shares) is where all shareholders agree to sell all issued shares of the Company to the purchaser. A Share Purchase Agreement is the sale of some (not all) issued shares of a corporation from a current shareholder to a purchaser. In a Share Purchase Agreement the purchaser could be another shareholder or a third party.


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Definitions

What is meant by the Goodwill and Business Name asset?

The business name or goodwill of a successful business has value in the form of repeat customers and reputation in the business community. The business name may have considerable impact on the continued success of the business after the transfer of ownership at least in the short term. An accurate dollar value representing the goodwill in the company is difficult to determine. If the seller wishes to include goodwill as part of the sale price then a qualified accountant should be used to find a fair value for goodwill.

What is meant by a Non-Competition clause?

A non-competition clause prevents the seller from starting or working for a company that will directly compete with the purchaser after the closing date. The seller may have many business contacts in the industry as well as inside knowledge of the business and would have considerable advantage if they started a similar business in competition to the purchaser after closing. The restriction from competition can be for a period of time into the future and for a specific geographical location.

What is meant by a Non-Solicitation Agreement?

A non-solicitation clause prevents the seller from recruiting any of the employees away from the purchaser after the closing date. This restriction prevents the seller from doing harm to the business by luring away the experienced staff now and in the future.

What is meant by a material agreement?

A material agreement would be one that has a specific impact on the business either because of cost or because of a relatively direct impact on revenue. A contract with a customer for future sales or a contract with a supplier for mandatory purchase of goods in the future would be examples of material agreements. Partnerships in ventures related to the core activity of the business would also be considered a material agreement and should be explicitly included or excluded in the sales agreement.

What is meant by representations and warranties?

Representations and warranties are disclosures that one party makes to the other party concerning issues related to the business. This usually involves providing a promise or guarantee of satisfaction to the other party concerning the issue. An example of a representation and warranty would be where the seller guarantees to the purchaser that all equipment related to the business has been maintained in good running condition in accordance with standard industry practice.

What is meant by conditions precedent?

A condition precedent refers to a term of the agreement that must be met prior to the closing date. If the conditions precedent are not met then the agreement would usually be void. An example of a condition precedent would be that the seller must obtain permission from a landlord to assign a commercial lease over to the purchaser prior to the closing date.

What is meant by confirming representations and warranties with an Officer's Certificate?

In order for negotiations to proceed smoothly and to ensure there are no surprises on the closing date, each party should provide the other with a written assurance that all representations and warranties have been addressed and are valid. Each party would provide an individual or officer to make the assurances to the other party. This task may be assigned to an officer of the party's corporation. For a non-corporate business entity this task could be assigned to a member of the management team.

What is meant by confirming representations and warranties with a legal opinion?

In order for negotiations to proceed smoothly and to ensure there are no surprises on the closing date each party should provide the other with a written assurance that all representations and warranties have been addressed and are valid. Each party would provide an individual to make the assurances to the other party. In the interest of full disclosure and transparency, an impartial third party such as an attorney may be used to provide this assurance.


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