The sale of any ongoing business, even a sole proprietorship, can be a complicated transaction. The buyer and seller (and their attorneys) must consider the law of contracts, taxation, real estate, corporations, securities, and antitrust in many situations. Depending on the nature of the business sold, statutes and regulations concerning the issuance and transfer of permits, licenses, and/or franchises should be consulted. If a license or franchise is important to the business, the buyer generally would want to make the sales agreement contingent on such approval. Sometimes, the buyer will assume certain debts, liabilities, or obligations of the seller. In such a sale, it is vital that the buyer know exactly what debts he/she is assuming.
In any sale of a business, the buyer and the seller should make sure that the sale complies with the Bulk Sales Law of the state whose laws govern the transaction. A bulk sale is a sale of goods by a business which engages in selling items out of inventory (as opposed to manufacturing or service industries). Article 6 of the Uniform Commercial Code, which has been adopted at least in part by all states, governs bulk sales. If the sale involves a business covered by Article 6 and the parties do not follow the statutory requirements, the sale can be void as against the seller’s creditors, and the buyer may be personally liable to them. Sometimes, rather than follow all of the requirements of the bulk sales law, a seller will specifically agree to indemnify the buyer for any liabilities that result to the buyer for failure to comply with the bulk sales law.
Of course the seller’s financial statements should be studied by the buyer and/or the buyer’s accountants. The balance sheet and other financial reports reflect the financial condition of the business. The seller should be required to represent that it has no material obligations or liabilities that were not reflected in the balance sheet and that it will not incur any obligations or liabilities in the period from the date of the balance sheet to the date of closing, except those incurred in the regular course of business.
A sale of a business is considered for tax purposes to be a sale of the various assets involved. Therefore it is important that the contract allocate parts of the total payment among the items being sold. For example, the sale may require the transfer of the place of business, including the real property on which the building(s) of the business are located. The sale might involve the assignment of a lease, the transfer of good will, equipment, furniture, fixtures, merchandise, and inventory. The sale may also include the transfer of the business name, patents, trademarks, copyrights, licenses, permits, insurance policies, notes, accounts receivables, contracts, cash on hand and on deposit, and other tangible or intangible properties. It is best to include a broad transfer provision to insure that the entire business is being transferred to the buyer, with an itemization of at least the more important assets to be transferred.
In making this allocation, the buyer’s interests will often conflict with the seller’s. The seller will ordinarily seek to maximize its capital gain and ordinary loss by allocating the price to items producing such a result. The buyer will normally seek to have the price allocated to depreciable assets and to inventory in order to maximize ordinary deductions after the business is acquired.
In its simplest form, the sale of a sole proprietorship could have provisions similar to the following:
In consideration of the mutual promises and covenants of the parties, Seller sells, assigns, transfers, and conveys to Buyer all the stock of goods, furniture and fixtures, accounts, and office supplies, including also the lease of the building occupied by Seller at (street address, city, county, state, zip code).
The consideration for these assets is $_____________, receipt of which is acknowledged by Seller. The proration of the consideration is as follows:
- Furniture and fixtures: $___________________.
- Stock of Goods: $________________________.
- Office supplies: $ ________________________.
- Accounts receivable: $ ____________________.
- Lease: $_________________________.
Total: $__________________
Buyer, and its successors and assigns, shall have and hold the property forever. Seller covenants with purchaser that the property is free from all encumbrances; Seller has the legal right to transfer and sell the property; and Seller will defend the title to the property against all persons. It is further a part of the consideration of this transfer that the name of Seller or any part of it shall not be use by Buyer in the operation of the business subsequent to this transfer nor will the name be sold or transferred by Buyer to any other person or persons. This restriction shall not be construed to prohibit the designation by Buyer that it is the successor to Seller.
Often such an agreement will contain a covenant not to compete similar to the following:
Seller shall not, either directly or indirectly, alone or with others, enter into or engage in the (type of nature of business) business within (restricted area, such as city or certain number of miles from business being sold) for a period of ____ years from the date of execution of this agreement. Further, seller shall not, during that period divulge, communicate, use to the detriment of buyer or for the benefit of any other person or persons, or misuse in any way, any confidential information or trade secrets of the business sold under this agreement, including customer lists, personnel information, and secret processes or other technical data.
For such a covenant to be enforceable it must be: i) necessary to protect a business; ii) reasonable in time; and iii) reasonable in the geographic scope (i.e., the territory covered).
The same matters should be considered in the sale of a business owned by a partnership as in the sale of a sole proprietorship. The contract of sale should distinguish the transaction as a sale of assets rather than as a sale of partnership interests. However, the sale of a partnership interest can be accomplished with language similar to the following:
Assignor, by this instrument, assigns all of Assignor’s right, title, and interests in the Partnership, being a _____% share of the business, to Assignee. Assignor shall be relieved of any future liability for Partnership debts and shall no longer be entitled to any share of the Partnership profits or assets. Assignee shall be entitled to all future shares of the Partnership profits or any distribution of assets, in accordance with said Partnership Agreement and shall assume liability for a proportionate share of all future partnership losses in accordance with said Partnership Agreement.
The same matters should be considered in the sale of a business of a corporation or a limited liability company as in the sale of a sole proprietorship. The contract of sale should distinguish the transaction as a sale of assets rather than as a sale of stock in the corporation or membership units in a limited liability company.
All states have adopted some form of the Model Business Corporation Act (MBCA) or the Revised Business Corporation Act (RMBCA). Both the MBCA and the RMBCA require that the sale of all or substantially all corporate assets be authorized by the shareholders and/or directors of the corporation.
