Cover Your Assets When Selling Your Business
Entering into a buy-sell transaction? Learn fundamental steps to protect your assets.
Typically, in a commercial buy-sell transaction the buyer’s lawyer gets to draft the contract. Of course, the seller should be on guard. The buyer’s lawyer could simply not be knowledgeable about appropriate terms in an alarm transaction, or could be experienced, unfair and hoping to take advantage of a seller with a less experienced attorney. What should the seller be most concerned about?
Certainly the paramount concern is getting paid, and the amount agreed upon and expected. Almost all deals fall into two categories: 1) most of the purchase price paid at closing, the balance held back for a period of time so that the buyer can deduct post-closing adjustments; 2) some money paid at closing and the seller holding the buyer’s promissory note or obligation to pay off the purchase price during an agreed-upon term.
Let’s address the first scenario, a cash deal with a holdback. The seller should watch for the following:
- Buyer’s agreement of confidentiality between contract and closing, and restrictive covenants if the transaction does not close for any reason.
- Bank check or wire at closing.
- Holdback held in attorney escrow account.
- Guarantee terms clearly specified, particularly identifying buyer’s post-closing conduct or actions that void the guarantee for particular or all accounts.
- Simple procedure to challenge claims under the guarantee.
- Assurance that buyer will in good faith do everything reasonable to maintain accounts during the guarantee period.
- Buyer’s agreement to collect pre-closing receivables if still property of seller.
- Buyer’s agreement to indemnify seller from any damage, including legal fees, for post-closing claims.
For the second scenario, where the seller gets paid over time, all of the above except No. 3 apply. The seller in this scenario additionally needs to be concerned with the following:
- Buyer’s ability to continue servicing not only seller’s accounts but all accounts serviced by buyer.
- Seller should have a security interest in at least the assets sold, and in all buyer’s assets if that can be negotiated.
- Seller should be concerned with buyer’s finances, outstanding debt service and operational services.
- No further encumbering of secured collateral should be permitted without seller’s consent.
- Strong security agreement and promissory note, which are drafted by seller’s, not buyer’s, attorney.
- Make sure you file the UCC-1 to perfect the security interest.
- Seller should have backup plan in case of buyer’s default and seller is compelled to take back the collateral (the accounts) rather than recover the balance of the money that’s owed.
While the cash at closing may appear to be less complicated and risky, the payout may offer an opportunity to ultimately get a higher multiple. It also may be the only option if selling to family, employees or in some markets where buyers are not knocking on seller’s doors.
You should not enter into a buy-sell transaction without a knowledgeable attorney to assist you. When do you bring the attorney in? Before you start negotiations. You don’t want to agree to terms you later have to try to renege on because they turned out not to be in your best interest. The sale of your business may very well be a once-in-a-lifetime matter. You certainly don’t want it to end up causing you regret and aggravation. Your attorney can educate you in these transactions before you shake on a deal.
Ken Kirschenbaum has been a recognized counsel to the alarm industry for 35 years and is principal of Kirschenbaum & Kirschenbaum, P.C. His team of attorneys, which includes daughter Jennifer, specialize in transactional, defense litigation, regulatory compliance and collection matters.
The opinions expressed in this column are not necessarily those of SSI, and not intended as legal advice.
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