14 June, 2011

They want to buy your business, but not your company

It may come as a shock to some people, but when someone decides to buy your business, don’t be surprised if they don’t want to buy your company. Your company is a legal entity that, no matter who owns the shares, carries with it all oustanding liabilities and obligations it has incurred at any time in its past. Nasty tax penalties following audit, product defect claims, employment grievances, contract obligations, undisclosed side deals with customers and suppliers, etc, etc - a smart buyer of a business doesn’t want any of that to come along after the deal is done. While warranties and personal guarantees might help to cover such eventualities, they are very imperfect mechanisms, limited in time, scope and value, and they will restrict your ability to spend reinvest your hard-gotten exit money. So with small and medium size businesses, it’s very common to see what is known as an asset sale or ’sale as a going concern’. It’s usually cleaner and simpler for both buyer and seller.

In effect, you sell your business to the new owner by transferring your assets, staff and liabilities to the new owner, together with the right to operate the business in future. There are several variations on this theme, such as the original owner receiving all outstanding monies owing by customers and paying all outstanding monies owing to staff and suppliers as at the transfer date.

The catch with such a sale is transfering customers, suppliers, distributors and staff, especially if they are bound by contract. Each and every one might need new agreements signed by all parties and effectively substituting the new company in place of the old one. While often this can be achieved (but by no means always), it can take a lot of time, money and effort, and it is likely to delay and maybe diminish the final value. (This is why large businesses are almost always sold by share sale - the paper work is just too hard, but the risks are perceived to be lower).

Given that almost every business gets sold eventually, it will pay huge dividends if all your contracts (customer contracts, supplier contracts, employment agreements, property leases, product warranties, distribution agreements, etc) are written with such an eventuality in mind. Your lawyer should be able to draft some straightforward contract clauses to enable the transfer of rights and obligations in the event of selling all or part of the business on a going concern basis. Even if you’ve been in business for a while, it’s never too late to start. Insert a business transfer clause into all future contracts, including renewals of existing contracts.

Sometimes someone will refuse to accept a contract with a business transfer clause in it. Then you make a choice whether or not to still do that particular piece business. But, for most practical purposes, such a clause should be your norm and will enhance the attractiveness of your business.

First posted March 5th, 2008 

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