‘Buyer Beware’ of Business Purchase Contracts!

Paperwork, specifically legal documents, is a prerequisite to
buying any business. It doesn’t make any difference if you buy
a business once in your life or do it all the time, every
business acquisition purchase contract is different and
requires intense scrutiny on the part of the business buyer,
much more so than the business seller.

As a business buyer, each and every sentence within the business
purchase contract needs to be read, understood and agreed to
before you sign on the “dotted line”. This article will give
the business buyer a quick “fly-over “of the most significant
concepts one should understand relative to development and
eventual execution of any business purchase contract.

“He Who Writes, Wins!”

If you have been consistently exposed to business contracts in
your career, you quickly learn to appreciate the concept that,
in development of most complex business agreements, “He who
writes, wins!” Any attorney will tell you that it is always in
his, his client’s, best interest to be the author of the
business contract to be signed in a two party agreement. As a
business buyer, you want to be the writer of the purchase
contact. If you personally cannot effectively write one, invest
the money and have a competent contract lawyer write a purchase
contract on your behalf. If the business seller, or their legal
counsel writes the business purchase contract be sure you and
your attorney evaluate every detail within.

Always Maintain a “Paper Trail”

Given the extraordinary amount of capital involved in most
business mergers or acquisitions, coupled with the wide range
of people, conversations, meetings and iterative business
evaluation steps involved to effectively buy a business, it is
imperative for the business buyer to maintain ongoing, copious
notes of all related events and communication exchanged between
themselves and the business seller or their designated
representative, throughout the purchase process.

There are three significant advantages for the business buyer in
maintaining a paper trail of notes during the purchase process:
1) All key agreement points can be traced to a specific buyer/
seller conversation, 2) If something is written, it can be
improved upon by either party, if it is not documented, the
likelihood of refining the content is significantly reduced, 3)
Sometimes related records can be incorporated into the final
business purchase contract as an addendum or attached exhibit

“Buyer Beware!”

As a business buyer, you like to think that all business sellers
are honest, forthright and have genuine intentions of
developing a mutually beneficial business purchase contract.
Most business sellers are! However, like in any complex asset
purchase agreement, neither party knows what negative future
consequences may surface in the ownership of the sold asset.
More often than not, in a business purchase contract, it’s the
business buyer who exclusively must address the problem not
thought of or included in the final purchase contract. The
negative consequences of many common business misfortunes can
be reduced, shared between the business buyer and seller, or
eliminated altogether with proper business purchase contract
contingency language

Fundamental Business Purchase Contract Concepts

Listed below are some fundamental business purchase contract
concepts that any prudent business buyer will want to
incorporate in their legal due diligence and documentation
fulfillment:

Astute business buyers never present an offer to purchase
a business without preceding it with a nonbinding “Letter of
Intent” to purchase. (If you are not familiar with the
purpose or advantages of use of a “LOI”, you must research
this topic)

Never make a purchase offer and certainly never sign a
purchase offer or make an earnest money deposit until after
you completed most of the due diligence required to
effectively evaluate the business for sale.

No business purchase terms should ever be communicated to
the business seller without a written statement from the
business buyer to the seller, specifically documenting,
“that any, and all, purchase terms are subject to analysis,
justification and confirmation by an independent business
appraisal entity, employed and paid by the business buyer”.

Be suspect of “canned” business purchase contracts
provided by the seller’s broker or representative, they are
typically “seller biased”

Be sure to negotiate a reasonable time period to evaluate
and approve all documents provided to you from the business
seller or their representative for your required due
diligence

Invest in an environmental analysis of the business
premises and keep the business seller “on the hook” for any
future environmental $ penalties or negative consequences
realized as a result any documented negative environmental
conditions made prior to the sale of the business

If something does not make sense to you, ask, make sure
you understand every detail

Utilize all the expertise available to you from your
intended primary lender on the deal

If there are noteworthy levels of inventory and assets
involved, inspect each item and use credible valuation
expertise to determine approximate market value. This can
represent significant dollars to you in the future as the
business owner.

All current legal encumbrances or extraordinary
liabilities should remain the responsibility of the business
seller

Any discovered misrepresentations associated with
documents provided by the seller or their designated
representative to the business buyer, that surface in the
future operation of the business should remain “fair game”
for financial resolution, from the seller to the buyer, post
purchase

All records provided by the seller or their designated
representative, to the business buyer should become an
purchase contract addendum or exhibit and be subject to
seller warranty of accuracy

Lastly, there are published business purchase contract
content “checklists” available, take the time to review
these, especially business seller warranties and
representations

Typical business purchase contracts prepared by business sellers
or their representatives often contain many provisions which
are dangerous to business buyers. In many cases it is not what
is written that is of greatest concern, it is what is omitted
that represents a potential time bomb that will eventually
explode long after the business seller has left town with your
money. Take the time, invest the money, expend the necessary
thought required to structure a mutually beneficial business
purchase agreement with the business seller!