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Most business sales begin with an offer from a Buyer to the Seller. In all but the largest and most complex deals, it is best to avoid a “Non-Binding Letter of Intent,” and go straight to a Purchase Offer, accompanied by a Deposit Check. This saves time and demonstrates that the Buyer is serious. Once the Seller accepts the offer, it becomes a “Sale Agreement,” which in turn will become “binding” upon the completion of specified conditions—such as the Buyer’s approval of the books and records. The offer is best prepared by a Business Broker on his Trade Association form, to help ensure that it is clear and comprehensive. The California Association of Business Brokers, for example, provides an excellent form to its members.
Most buyers want to buy the assets, rather than the stock, of a small business. An Asset Sale helps them to avoid the potential liabilities of a corporation, and also enjoy higher depreciation and lower income taxes in the future. Consequently, buyers are generally willing to pay more for in an Asset Sale than in a Stock Sale. Sellers should keep this in mind when considering the alternative Stock Sale, which can create less tax liability, but lead to a lower price. Sellers should discuss their options and implications with their accountants and business brokers.
An asset sale typically includes everything that buyers would reasonably expect to be in the business, except its liabilities and current assets. The Buyer gets the business name, suppliers, customers, intellectual property, fixtures, equipment, inventory, telephone numbers, website, etc. The Seller keeps his cash, bank accounts and financial records. The parties can agree to include or exclude just about anything.
There are many other details that, once again, a good standard form and business broker will cover. For example, the Sale Agreement should contain the Seller’s Representation and Warranties—such as that the business complies with the law, and has accurate books and records. The agreement should reference the Buyer and Seller Disclosure Statements, wherein the parties disclose material facts about the business and themselves to each other. The agreement should also describe the roles, benefits, and responsibilities of all of the parties involved—including the brokers and the escrow company.
The Purchase Offer will specify Conditions that must be satisfied before the sale can be completed. The initial conditions, usually completed before opening escrow, allow the Buyer to approve the “Books and Records” of the business, while the Seller approves the Buyer’s credit and ability to run the business. The remaining conditions are completed during escrow—e.g. funding of a third party loan or transfer of a lease, franchise or license. Escrow cannot close, and the sale cannot be completed, until all Conditions in the Sale Agreement are satisfied!