Business sale contracts are vital when transferring ownership of a business. It protects the parties’ interests and serves as proof of the transaction. Although the sale of a business or trade is one of the more complex transactions, it helps to know the ins and outs of a business sale contract, as well as partnering with a business purchase lawyer.
This article discusses the definition and scope of a business sale contract, how it helps the parties involved, and some critical aspects of the agreement.
What Is a Business Sale Contract?
A business sales contract is a binding agreement that is critical to evidence and detail the sale of business interest. In other words, it is a legal agreement that outlines and solidifies the transfer of ownership in a company or assets comprising all or a substantial part of the business from one party to another.
The contract typically contains the pertinent details regarding the parties involved and their relationship, such as whether they are corporate bodies or individuals, their respective addresses, and contact information. A business sales contract also defines the consideration or price for selling the business, the effective date of transfer, the terms of the agreement, and other information relevant to the sale. It is highly recommended you consult with a business sale lawyer for the creation of the sale contract to ensure it is legally sound and protects all parties involved.
When all parties are in agreement and have signed the contract, the agreement is generally considered complete. This serves as evidence of the agreement, and the parties must then perform their parts of the bargain. The signed agreement and subsequent performance confirm the intent to transfer ownership and are accompanied by the transfer of rights and responsibilities associated with the business.
The Importance of Business Sale Agreements?
Business sales contracts help individuals and corporations avoid litigation or assist them when disputes arise. They also provide proof of transfer of ownership and ensure transparent transactions between the parties. Business sales contracts are popular among individuals and corporate bodies for the following reasons:
- Gives you a working document: The process of developing a sales agreement allows all parties to work together, consult professionals, negotiate, and otherwise approach this significant transaction with much consideration and reflection in great detail. It encourages a collaborative approach and can ultimately lead to a better outcome for all.
- Prevents miscommunication: Business sales agreements specify the terms between the parties and establish certainty in their engagements. Although there is a possibility of misinterpretation, well-drafted sale and purchase agreements generally express the parties’ intentions and mitigate the risk of disputes. They serve as reference points in case of miscommunication between the parties and clarify misunderstandings.
- Provides legal backup: A crucial feature of business sales agreements is they protect the interests of both parties in the event of legal action. A business sale contract is evidence of the parties’ agreement in any dispute resolution mechanism. It assists the courts, arbitrators, and lawyers in ascertaining each party’s rights, obligations, duties, and liabilities.
- Provides relevant details: Business sale contracts establish the details. They should aim to answer almost any question that could be posed about the transaction, including about the value of the business and asset sold, the date of transfer, the parties involved, the method of dispute resolution, and the governing law. The contracts guide the parties and those they deal with when necessary.
Aspects of a Business Sale Contract
Selling a business often involves the sale of all the assets in the entity and transferring ownership. It’s prudent to set out the terms in detail and cover all relevant aspects of the transaction, which includes the following:
1. Parties
Every business sale contract must include the names of the parties involved. The parties could be individuals or corporate bodies such as companies. The agreement must also provide the addresses of the parties and designate the buyer and seller in clear terms and state the name and location of the business under sale. This helps to allocate rights, duties, and liabilities under the agreement and provide certainty regarding the subject matter.
2. Assets
The sale of business predominantly rests on the entity’s assets. The agreement must detail the transferred assets and the kind of interest in them. The physical assets may include real estate, inventory, vehicles, machinery and equipment, and fixtures.
Examples of intangible assets are intellectual property, business name, and goodwill. If applicable to the sale, the agreement must contain financial assets such as stocks and other market securities, money market funds, and account receivables. If any property is not part of the sale of the business, the contract must expressly state so.
3. Liabilities
The sale of a business transfers assets and ownership in a company, along with liabilities. The business sale contract must specify any liabilities the buyer assumes. It must also identify the nature and extent of liabilities. If no liability transfers to the buyer, the contract must state that. Liabilities may include taxes, outstanding debts or loans, and accounts payable.
4. Confidentiality Agreement
A business sale contract should include a non-disclosure clause in the agreement to bind the parties not to disclose any sensitive information to any third party. Confidential information is any information obtained through the agreement, which should remain private throughout the contract and, sometimes, after.
5. General Terms of Sale
The terms of sale describe the parties’ relationship specifying each party’s rights, duties, and obligations. One vital term to include is the consideration, which deals with the purchase price of the business. The contract must indicate whether the consideration is to be provided wholly or partially in monetary funds or if the buyer will be making payment in kind. Again, if the buyer will put up collateral or security, you must spell that out in the contract.
The agreement must also state the payment process, whether by lump sum or installment, and the mode of payment, such as bank transfer or cash. State if the sale will be financed, the interest rate, and whether a deposit will be required. The brokers, agents, and financial institutions involved in the transaction must be noted.
Other relevant terms include the date of execution and the effective date of the contract. These inform anyone with access to the contract when it was signed, and the day the agreement took effect. It also gives you an idea of when the ownership in the contract passes to the seller in the absence of contrary intention.
It’s also essential to define the allocation of the purchase amount in the categories defined by the Internal Revenue Service (IRS). Remember that according to the IRS, the sale of a business for a lump sum is considered to be a sale of each individual asset rather than a single asset.
Therefore, buyers and sellers must consider the value of most individual assets involved in the sale unless there is an exchange taking place or the transaction falls under another IRS nontaxable exception. The seller and buyer must use the residual method in allocating consideration transferred under the contract, except for the assets exchanged under the nontaxable rules.
In establishing a value for the assets, and therefore the transaction, the buyer’s basis in the business will be established. To do so, one looks at the loss or gain in transferring each asset and consideration for goodwill and other intangible assets. Where their transaction involves a lease, the contract must specify that closing is contingent on the landlord’s consent to use the property subject to the current rents and lease provisions.
Other relevant terms in the business sale contract include warranties and indemnities, due diligence, licenses and transfers, non-compete agreements, and attorney’s fees provisions.
6. Dispute Resolution Clause
This clause defines the dispute resolution procedure when misunderstandings occur. For instance, the contract may indicate whether the parties should resort to arbitration or litigation, the applicable law, and the jurisdiction where the dispute will be resolved.
Do You Need a Lawyer to Sell Your Business?
Securing the services of a business acquisition lawyer when selling a business is advisable. The sale of trade or business involves complex processes that may cause several legal challenges if not properly negotiated and executed. It requires you to thoroughly examine the business’s standing and review the proposals carefully before drafting and signing the contract.
Attorneys provide reassurance throughout the process and bring a wealth of experience. This is crucial, especially when the transaction involves real estate, as many sales of business agreements do. Business sale lawyers help you avoid unnecessary litigation, stress, delays, and expenses.
In summary, lawyers help you reach favorable terms, protect your interests, handle complex paperwork, and act as legal counsel during and after the sale.
Find a Business Sale Lawyer Today
Calabrese Law Association serves individuals and businesses in the Greater Boston Area and helps them rise above their legal challenges, focusing on legal excellence, efficiency, and quality client services. Our business purchase lawyers are available to listen and assist you with your legal needs. Contact us now to learn more about our services.
This publication and its contents are not to be construed as legal advice or a recommendation to you as to how to proceed. Please consult with a local licensed attorney directly before taking any action that could have legal consequences. This publication and its content do not create an attorney-client relationship and are being provided for general informational purposes only.