Business For Sale Contracts: Understanding the Agreement to buy

The Basic Business For Sale Agreement

Whether you are buying a business or selling one, a certain number of legal papers are a necessary part of that transaction. One of the most important is the Business For Sale 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 Business For Sale agreement will have shared provisions in spite of 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 Business For Sale 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 Business For Sale 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,” “move date,” “warranties,” and so on. There may also be sections that address the following elements:

• How much of a place 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 limitations 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.

meaningful Terms to Know

already for people who have bought and sold many businesses in the past, the importance of understanding the rare language of a Business For Sale contract cannot be overstated. Here are a few terms that often crop up in a Business For Sale agreement, along with some basic definition of their meaning within this context:

• Letter of intent – This document often precedes the actual Business For Sale contract, but it may contain a number of legally binding provisions that carry over into the dominant sales agreement; this may include some non-disclosure language in addition as a potential 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 yearly), in addition 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 time of action a prospective buyer goes by in order to probe 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 unprotected 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; already though these items are unprotected 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 possible profit, oftentimes owners will pay for things by the company instead of 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 means 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.

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