In today’s world, most purchases and sales of businesses are of business assets, not stock, and it becomes imperative to know exactly what the business assets are. It is also important to know if the assets have been pledged as collateral for a loan, and whether they are owned by the business or leased by the business. Three recent problems come to mind with respect to the value of the business assets.
The first client wanted to sell her business, which she had purchased some five years before. I asked to see the purchase agreement and list of assets. One of the assets listed was the electric sign on the outside of the business. This sign was a permanent fixture on the building the business rented and was owned by the owner of the building, and, although it was incorrectly listed as an asset purchased by the current owner, this asset could not be resold as part of the business because the business didn’t own it. Clearly a mistake had been made at the time of the initial purchase.
The second client was purchasing a business. When I represent the purchaser, I always check for liens recorded on any of the business assets. In this case, a UCC check at the State Corporation Commission revealed a UCC-1 filed by a bank against the business’s inventory. We worked with the bank to release its security interest in the inventory; however, the closing was postponed in order to work out the details, and the selling party received less for the business than he had expected because the bank loan had to be paid.
The third client was also purchasing a business. A significant portion of the assets was inventory. The seller had taken the inventory at the time he put the business on the market and resisted taking the inventory again at time of closing. I recommended to the purchaser that he insist on taking the inventory again, and he did. As it turned out, the seller had sold off much of the inventory without replacing it. The new inventory resulted in a significant reduction in the purchase price.
What is the take-away from these three scenarios? Be sure you know what you are buying! Review the asset list with an attorney. Are the following assets included: name, phone number, customer list, assignment of leases and licenses, if any, furniture and equipment (if any furniture or equipment belongs to an individual and not the business, be sure to itemize and exclude these items) and inventory are basic items. Additional items may be added, depending on the business.
Do you want to prevent the seller from opening a competing business? Then you must include a non-competition provision in the Purchase and Sale Agreement.