Business For Sale Contracts: Understanding Business For Sale Agreements
The Basic Business For Sale Agreement
Whether you are or selling one, a certain number of legal papers are a necessary part of that transaction. One of the most important is the contract. While the exact form of this document may vary from state to state (or from country to country) depending upon various laws that govern the sale of a business, every agreement will have common provisions regardless of the jurisdiction in which it is filed. Much of the language may be considered “boilerplate,” which is a block of text that can be reused from one contract to the next. The purpose of a contract is to explain, in great detail, exactly what is being sold to the buyer, at what price, and under what terms.
Standard Contract Provisions
The agreement will begin with something called “recitals,” which include the names of the two parties involved in the transaction and explain the purpose of the document. It will go on to list a definition of terms, so that there is no misunderstanding by either side as to the meaning of such words as “stock,” “transfer date,” “warranties,” and so on. There may also be sections that address the following elements:
- How much of a deposit the buyer will pay, when the balance is due, how any seller-based financing will be repaid, and under what terms.
- Whether or not employees will be retained, and how the change in ownership may affect things like retirement plans and other benefits.
- Which assets are included in the transaction, which are not, and how the current market value has been calculated.
- How existing company debts and liabilities will be treated.
- A listing of any warranties that relate to the equipment on hand.
- The contracts and leases that will accrue to the new buyer, plus an explanation of their terms and conditions.
- How any buyer / seller disputes will be resolved.
Key Terms to Know
Even for people who have bought and sold many businesses in the past, the importance of understanding the unique language of a contract cannot be overstated. Here are a few terms that often crop up in a agreement, along with some basic definition of their meaning within this context:
- Letter of intent – This document often precedes the actual contract, but it may contain a number of legally binding provisions that carry over into the primary sales agreement; this may include some non-disclosure language as well as a promise to negotiate in good faith.
- Cash flow statement – A declaration of how much cash a company has on hand at any given time (reported quarterly and annually), as well as an accounting of how the money was obtained: from operations, investing, or financing; the purpose of the cash flow statement is to offer information on the company’s fiscal health and its ability to pay bills.
- Due diligence – This catch-all phrase refers to the process a prospective buyer goes through in order to investigate the value of a company; material to be reviewed under due diligence may include balance sheets, profit-and-loss statements, patent filings, equipment leases, and so on.
- EBITDA – This acronym stands for “earnings before interest, taxes, depreciation, and amortization.” EBITDA proves useful in the ability to compare one company’s value against another’s by eliminating how different financing or accounting methods may skew an accurate comparison; it essentially levels the playing field for firms that are heavily invested in expensive assets that are subject to long-term write-offs.
- FF&E – These initials stand for “furniture, fixtures and equipment, referring to hard-asset items that are likely to be included in the sale of a business; even though these items are subject to steep depreciation (just imagine how much a PC bought in 1999 is worth today), understanding the value of FF&E is a vital part of comprehending the value of the company.
- Seller’s discretionary cash flow (SDCF) – While knowing a company’s net earnings will help a buyer understand its potential profit, oftentimes owners will pay for things through the company rather than personally due to tax-deductible considerations. By adding back to the bottom line such items as interest paid, the cost of a cell phone, or vehicle lease payments (things the new buyer may not pay), one will arrive at the company’s SCDF; this is a more accurate assessment of how much money a business has earned.
Looking for the best businesses to buy? We have over 32,000 Businesses For Sale and 100s of Franchise Opportunities! Whether you are looking to buy a business or buy a franchise, you can get FREE information today.