San Jose Business Attorneys Assisting Small Business Owners to Purchase or Sell a Business
Business Asset Purchase and Sale Agreements
The complexity of these agreements depends on the type of business being purchased and sold. For example, the purchase and sale of a gasoline station will involve careful negotiation concerning potential environmental liabilities. As noted above, the assets being sold may include a good deal of intangibles, such as customer goodwill, trademarks, and trade secrets. In some small business sales, the transfer is of a franchise business, in which case, the franchisor must consent to the transfer of the franchise from seller to buyer.On both the buyer’s and the seller’s sides, a critical area of asset sale agreement negotiation is in the disclosure and disclaimer of liabilities. Many assets, particularly intangible assets such as executory contracts, intellectual property rights, licenses, etc. come with strings attached. As experienced business lawyers, we help buyers perform their due diligence in small business purchases and help sellers examine carefully what they are selling and avoid unanticipated warranties.
Issues Common to Business Transfers
Most business transfers present common issues, including lease assignment negotiations with commercial landlords and the obtaining of new business licenses, and permits, e.g., Seller’s Permits, Contractor’s Licenses, liquor licenses, etc. Frequently the sale of a small business presents a variety of employment law issues that we must address with appropriate new employment agreements or severances. Any business purchase/sale should also include a business escrow agent, who should post bulk sale notifications as required by law, obtain tax clearances and perform lien searches. Our business attorneys can help in contacting and establishing an outside business escrow.The Importance of the Buyer’s and Seller’s Representations and Warranties
Most every business asset purchase and sale agreement will include sections covering the representations and warranties of both the buyer and the seller. These representations and warranties are often the most negotiated provisions in the agreement. Likewise, because these representations and warranties will typically survive the closing of the transaction, these provisions tend to be the most litigated issues after a transaction has closed. From the Seller’s perspective, the Seller’s representations and warranties should be as minimal as the Buyer is willing to accept. Of course, it is imperative as well that all such representations and warranties are true if the Seller wishes to avoid liability to the Seller after the transfer has been completed. From the Buyer’s perspective, of course, the more substantive representations and warranties that the Seller is willing to make, the better. Just as a consumer purchasing a car will prefer as long and as comprehensive a warranty on the vehicle that he or she can obtain, so will the Buyer of a business desire as comprehensive a set of Seller’s warranties as can possibly be negotiated by his or her business attorney. In essence the entire negotiation is one of shifting risk back and forth between the parties.At a minimum, a Buyer should expect that the Seller warrant such things as the fact that the Seller holds good marketable title to the assets being sold. This means that the Seller actually owns what is offered for sale without any competing ownership interests to the assets. There might of course be a lien or security interest held by a third party to some asset involved in the sale, such as a secured loan on a company vehicle. Of course, the Buyer may expect this and agree to assume the liability on the particular asset. The fundamental issue here is one of disclosure. To avoid liability to the Buyer later, the Seller must disclose the existence of such an “encumbrance” on title to the asset. Hence, a good deal of the work by the business lawyer involved in assisting a Seller prepare a business purchase and sale agreement concerns helping the client work through its warranties and its disclosures and disclaimers that condition such warranties. The Seller may make a warranty that all assets are held “free and clear” but then add various exceptions to this warranty. Such exceptions are generally compiled in an exhibit to the purchase and sale agreement called a “Disclosure Schedule.”
The exceptions to a Seller’s warranties and representations, then are critically important to protecting the Seller in the transaction. Where intangible assets such as assignable contracts or intellectual property are concerned, warranties as to assignabilty or title to IP must be very carefully crafted and thought through. This is particularly true here in San Jose, where such intangible assets are so commonly part of the business being purchased and sold, which is another reason why it is so imperative that the parties retain experienced San Jose business attorneys. If a third party must consent to the assignment of a license, such permission must be sought and the necessity of such consent must be disclosed to the Buyer.
The Escrow Period and Due Diligence
Likewise from a Buyer’s perspective, legal counsel should take great care in assisting the client purchasing a business to investigate each and every representation and warranty, as well as all exceptions thereto made by the Seller. If a Seller discloses that in order for the business to operate using a particular licensed software application, for example, it is crucial that the Buyer ascertain — before the transaction closes — that the owner of the software will readily agree to the assignment of the Seller’s license. It is likewise just as important that the Buyer, in conducting such due diligence, have anticipated this issue, and that the Buyer’s business attorney has ensured that the business asset purchase and sale agreement include such third party consents as conditions to the closing of the transaction so that Buyer has a way out of the contract if such third party consent is not forthcoming. Where the deal concerns the purchase of a franchise or includes the assignment of a commercial lease, as noted above, such issues are readily apparent. Where the transaction involves less obvious items, such as a software license, the issue may not be as obvious to the Buyer. Hence it is critical that the Buyer be represented by experienced business counsel such as the Law Offices of Jon G. Brooks. We have extensive experience in negotiating business asset transactions on behalf of both Buyers and Sellers.Just as with a residential purchase, the period after the execution of the purchase agreement and the closing of escrow is the period during which the Buyer must conduct extensive due diligence to ensure that all the Buyer’s conditions are met prior to closing. While a business escrow service can be expected to conduct simple lien searches, and obtain tax clearances, issues such as third party consents, franchise issues, licenses, lease assignments and the like are items that necessitate experienced business legal counsel for the Buyer.