Asset Purchase Contract Explained
When a prospective buyer of a business wants to take the next step by putting in an offer on a business, in Florida, they will most likely be presented with one of several versions of the BBF (Business Brokers of Florida) Asset Purchase Contract. This contract was written by attorneys for the use of the BBF and its members. For years, it has constantly proven to be a very strong document in the case where legal issues have arisen. That’s why it has become the standard contract for business asset sales in Florida. Buyer and seller will undoubtedly want to know what’s in the contract, and what are the layers of protection that it offers to both parties. While we are not attorneys, and we did not write the Asset Purchase Contract, it is our job as Business Brokers to be able to explain the contract to our buyers and sellers. Of course, the parties are always encouraged to consult with their chosen legal counsel, should they feel it is necessary in a business sale transaction.
Purchase Price
One of the most important terms in the contract is the purchase price. That takes center stage on page 1 of the Asset Purchase Agreement. A breakdown of deposit, and the financing (if any) will be included in the purchase price section.
Earnest Money Deposit
Once an Asset Purchase Agreement has been executed (signed by both buyer and seller), then the Earnest Money Deposit will be due to the escrow holder, which is normally the closing attorney. It will need to be sent via bank wire transfer, on the first business day after execution. Buyers will receive wire instructions via email, but they are always encouraged to call the intended recipient before wiring funds, to ensure that the account number is correct. The amount of the deposit is negotiable, but it is normally 10% of the purchase price. The closing attorney/escrow holder will send verification of deposit to all parties once it’s received.
Seller’s Representation
In this section, the seller promises that all outstanding liabilities of the business will be paid before closing, and that all assets are sold free & clear of any encumbrances. They also declare that there is no current legal action against the business (if there is, it needs to be disclosed to the buyer and buyer and seller will sign to acknowledge). The last part explains that the seller is being truthful about prior operation, the assets, and financials. This section is important to the buyer, because they will undoubtedly want assurances of these items, and it is the buyer’s job to verify everything that the seller has presented during Due Diligence.
Buyer’s Due Diligence
This part of the contract outlines how many days the buyer has to conduct due diligence. The amount of time needed can vary based on the size of the business and whether or not there is commercial real estate included. The normal amount of time for due diligence for the average small business is 14 days. This is the buyer’s chance to ask any and all questions about operational procedures, financial records, contractual relationships, etc. This would also be the time to conduct equipment or property inspections. If the buyer is not fully satisfied by what they find during due diligence, then they are entitled to cancel the contract and receive their deposit back in full. Cancellation must be done before the expiration of the due diligence period. It’s important to note that the buyer is responsible for all costs related to due diligence, including inspections, hiring professionals to assist, etc.
Loan Commitment
If the buyer is securing third party financing, such as an SBA loan, then the contract will be contingent upon that loan being approved. There is a certain amount of time negotiated to allow the buyer to obtain a written loan commitment with terms acceptable to the buyer. The buyer can cancel the contract within the loan commitment period, should a satisfactory loan not be available to them, and receive their deposit back in full.
Escrow Hold Back
In many cases, the buyer may elect to request that a certain portion of the seller’s proceeds be held in an escrow account, post-closing, for an agreed upon amount of time. Both amount and time are negotiable. The reason for this is included in the section of the contract known as “Seller’s Indemnification and Buyer’s Right of Set-Off.” Basically, the seller holds the buyer harmless from all debts, claims, actions, losses, damages, and attorney’s fees either existing or that may arise from or be related to the seller’s past operation and ownership of the business. It is noted that should such a claim arise, that the seller agrees to satisfy the claim. Only IF the seller should fail to satisfy the claim, then the escrow holdback would come into play, in order to pay the claim.
Seller’s Operation and Loss/Damage
Buyers often want to know what happens if there is loss or damage during the contract to close process. This is very simply explained that the risk of loss is upon the seller before the closing, and all of the risk of loss after closing is the responsibility of the buyer. So, if something should happen before closing, maybe a piece of equipment stops working, the seller must make sure it is operational prior to closing. The seller is also obligated to keep running the business in exactly the same manner as has been customary in the past from contract execution to closing. This ensures that the buyer gets the business that they thought they were buying when they signed the contract, and that the seller doesn’t take their foot off of the gas.
Intangible Assets
In the contract, items such as the business telephone number, website, email address, social media accounts, and any other advertising that refers to said items shall be sold with the business, unless otherwise specified in the contract. Sometimes, a seller is just carving out a portion of their business to sell, such as a property management company selling a number of their management contracts. In this case, the business isn’t selling in its entirety, and therefore some of the intangible items, like the website and phone number won’t be sold as part of the business assets.
Licenses and Permits
Buyers often have questions about which licenses, permits, or certificates of occupancy that they will need, in order to run the business. The seller knows exactly what the buyer will need to have, so the seller is the best resource for the buyer on this topic. In fact, the seller is bound by the contract to assist in this process. “Seller agrees to cooperate with buyer in obtaining, at buyer's expense, any licenses, permits, approvals or certificates necessary for the continued operation of the Business.” The buyer can hire outside help for this as well, if they’d like. There are license professionals and attorneys who will do all of the license research and apply for all necessary licenses and permits on behalf of the buyer. This type of service is not cheap, but at least it’s an option. It’s important to note that the seller is also responsible for making sure that the business and premises meet, at the time of closing, all government regulations as to health, fire, zoning, and other licensing laws. Furthermore, the “seller shall bear the cost of repairs and/or alterations that are required to allow the buyer to operate the business in a lawful manner.”
Familiarization
This section of the contract outlines the agreement between buyer and seller on the familiarization period or handover from one owner to the next. It is customary that the seller includes a certain period of time (usually 2 weeks for an average-sized business) at no cost to the buyer. However, like most terms in the Asset Purchase Contract, this time period and the cost to the buyer is negotiable. Normally, if a buyer wants more time with the seller for familiarization, they can always negotiate proper compensation for the seller’s time. It is important to note that the familiarization period is not for the seller to be an employee and work in the business, it is for the seller to assist with the transition in business ownership from seller to buyer. An employment contract can also be agreed, if the seller is going to stay on with the company after the sale. The terms of that agreement between the parties should be worked out ideally during the due diligence period.
Restrictive Covenant
A non-compete agreement between the parties is almost always included in the Asset Purchase Contract. A buyer will not want to purchase a business, only to find that the seller is creating a new business just down the street that will compete with the one they purchased. Therefore, the buyer’s investment is usually protected by a restrictive covenant, where the seller cannot participate in competitive business activity within a certain geographical area (usually 25 miles) for a certain period of time (usually 3 years); however, these terms are negotiable. Now, depending on the circumstances, there can be certain carve outs such as an accountant just selling a portion of their accounting practice that specializes in one area. For example, she might hang on to all of her bookkeeping clients, but sell the clients she works on audits for. Whatever the agreement is, both parties have to have a meeting of the minds.
Lease Contingency
The buyer’s deposit is protected in the contract by a lease contingency, where applicable. The buyer needs to be able to assume the existing lease (if possible), be granted a new lease by the landlord, or if the seller owns the space and will be leasing it back to the owner, they will need to create, agree and sign a lease. If a lease is not able to be secured, and it is not to the buyer’s satisfaction, then the buyer doesn’t have to continue with the purchase of the business.
Attorney and Closing Fees
In a business sale, a closing attorney would handle the preparation of closing documents, hold any deposits or escrowed money, and conduct the closing (much like a title company’s role in a home purchase). Therefore, there are certain fees that will need to be paid to the closing attorney for the job that they do. Normally the fees are no more than a few thousand dollars for an average sized deal. According to the contract, the buyer and seller split the attorney fees and closing costs equally 50/50. However, certain items, such as fees associated with the preparation and filing of a Promissory Note in the case of seller financing, the buyer would be responsible for those expenses, just like they would be responsible for all of their loan related expenses if they were using an SBA loan to purchase the business.
Addenda
The offer is the purchase contract, and all terms are meant to be negotiated up front, as much as possible. Now, things do come up during the course of the journey from executed contract to the closing table, but any changes to the original agreement will be put in writing on an Addendum, and must be signed by both parties, to show that everyone agrees with these changes. Some examples of Addenda items might be a change in purchase price after due diligence, an extension of the closing date, agreement for work in progress, etc. If buyer and seller are working closely together during this process, and they make any agreements after the contract has been executed, they need to let their Business Broker know, so that the oral agreement between buyer and seller can be put into writing. Everything needs to be in writing...