What Should Sellers Look for in an Asset Purchase Agreement?
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 can be experienced, unfair and hoping to take advantage of a seller with a less experienced attorney. What should the seller be most concerned with?
Certainly, the paramount concern is being paid, and the amount agreed upon and expected. Almost all deals fall into two categories:
- Most of the purchase price paid at closing, and the balance held back for a period of time so that the buyer can deduct post-closing adjustments
- Some money paid at closing and the seller holding the buyer’s promissory note or obligation to pay off the purchase price over an agreed upon term
Let’s address the first scenario – a cash deal with a hold back. 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
- Hold back held in attorney escrow account
- Guarantee terms clearly specified, particularly identifying buyer’s post-closing conduct or actions that voids 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 is 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 continued 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 attorney, not buyer’s attorney
- Make sure you file the UCC-1 to perfect the security interest
- Seller should have back up 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 less risk, which I think is true, 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. Why? You don’t want to agree to terms that you will later have to try to renege on because your attorney explains and convinces you that you agreed to something that’s simply not in your interest and not commonly done. Your attorney can educate you in these transactions before you shake on a deal.
The sale of your business may very well be a once in a lifetime matter for you, and the most important business transaction of your life. Certainly, a seller enters into such a transaction with hopes and expectations of cashing in, retiring or moving on. What a seller doesn’t want is regrets and aggravation post-closing.
If you enjoyed this article and want to receive more valuable industry content like this, click here to sign up for our FREE digital newsletters!
Security Is Our Business, Too
For professionals who recommend, buy and install all types of electronic security equipment, a free subscription to Security Sales & Integration is like having a consultant on call. You’ll find an ideal balance of technology and business coverage, with installation tips and techniques for products and updates on how to add sales to your bottom line.
A free subscription to the #1 resource for the residential and commercial security industry will prove to be invaluable. Subscribe today!