Considerations Involved in the Sale of a Business
Business owners find themselves pondering a sale of their business for
many reasons. Sometimes, it is because they really had not considered
or developed a secession plan and, as they near retirement, a sale of
the business can be a good and profitable option. In other cases, a
secession plan has been developed, but just doesn\’t work out. For
instance, the owner\’s children or other principals of the business
decide they wish to pursue a different career. Sales of businesses are
also contemplated as a result of bids for the business from a
competitor or larger company.
You may ask, why do I need a real estate lawyer to help me sell my
business? The sale will always have a real estate component. If the
buyer intends to continue the business from your current location, that
current location involves real estate—-whether it be owned or leased.
Also, the assets being sold are “property” and a real estate attorney
with commercial experience can help you structure the sale. We\’ll
discuss the real estate components later.
A critical element of the sale will be the inventory of the business.
Important considerations become, categories of inventory, how to
calculate the purchase price for the inventory, and how the parties
agree upon how much inventory is being sold. Categories of inventory
include not only “on hand” inventory, but also “pipeline” inventory;
that is, items that have been ordered but not yet received by the
business. Subcategories of on hand inventory may include prime
inventory, slow-moving inventory, and damaged inventory. You can
expect, as a seller, that the buyer will not want to pay the same price
for each category. Therefore, the agreement of sale must contemplate
how to calculate the purchase price for the inventory. The calculation
should include not only the seller\’s actual cost for the inventory,
but, additionally, the freight costs and, if applicable storage costs,
both of which in many cases can be quite a high figure. Discounts off
of the agreed upon purchase price then need to be negotiated for
damaged inventory (which involves a further definition in the contract
as to what is to be considered “damaged” inventory). The parties must
also carefully consider when a “final” physical inventory will be taken
and by whom in order to firmly establish the inventory component of the
purchase price and what items transfer at closing. There are many
variations of this from a mutual inventory by the parties or one by an
independently appointed auditor.
Be sure to exclude from the definition of assets being sold, any assets
you wish to retain. For example, you may wish to retain a developed
trade name—particularly if you intend to carry on the business in
some form even after the sale. Also consider if there are furniture or
fixtures you wish to exclude from the sale.
As mentioned before, if the buyer intends to operate the business from
the current location, real estate considerations come into play. If the
location is owned by the seller, then the sale of the real estate will
be a part of the asset sale unless the seller wishes to retain
ownership of the building and lease the building to the buyer. If the
later option is chosen, then a commercial lease will become an
ancillary document to the sale of the business. In the event the
current location not owned by the seller, but leased by the seller,
that lease will need to be reviewed in connection with a sale of the
business. Particularly, the assignment provisions must be examined. An
assignment of the lease is a transfer of the seller\’s rights and
obligations as the tenant under the lease to the buyer of the business.
Often, commercial leases prohibit an assignment of the lease without
the consent of the landlord. Therefore, the landlord, in essence,
becomes a third party to the transaction and his consent must be
sought. From the buyer\’s point of view, the buyer will want to be sure
a sufficient amount of term exists on the lease to allow the buyer to
operate as long as contemplated by the buyer or that a sufficient
number (and length) of renewal terms exists. Be careful, as a buyer
here, because commercial leases sometimes state that renewal options
are personal to the tenant and not transferable to a party that takes
over the lease.
Whatever the reason, selling a business nearly always involves a high
amount of emotion and anxiety. It is important, however, to
thoughtfully consider and draft the terms of the sale of the business
assets and operations.