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Properly Prepared Purchase Agreements

Business For Sale Purchase Agreement

A properly prepared Purchase Agreement is of foremost importance in any business purchase. It should define all terms and conditions of the sale from the biggest items like price, down payment and any seller carry back note. It also should include the smallest of terms such as how many hours per day a seller agrees to train the buyer during the training period after the buyer takes possession of the business.

I have been amazed on how "skinny" some Purchase Agreements were on details that I have seen over the years from co-brokers that I have come across. Many have lacked important details. Should there have been a Covenant Not To Compete, if so what are exact terms of it? Should there have been an assumption of specific equipment leases? If the equipment lease is not assumed through escrow, the Seller can be liable for the balance of the lease payments.

I currently have an escrow where the buyer is assuming 3 equipment leases in addition to the purchase price. The leases add up to almost $5,000 per month for 3 years. Do the math, that's a lot of potential exposure for the Seller.

On the other hand, I have seen some Purchase Agreements used by residential type Brokers on the California Association of Realtors (CAR) form. It is a very comprehensive form, nothing wrong with it, but if not used properly it will tend to alienate sellers and or Listing Brokers. For instance all of the items on the Due Diligence check off part on this form do not apply to all businesses. For instance a restaurant does not keep a list of all its customers. So don't check that box. If the business does not have a web site, don't check the box on transferring the domain name. Some things just don't apply. Most uninformed Brokers check off every box on this form. That immediately tells me of their experience in selling businesses. As a Buyer and a Broker you shouldn't make yourself look foolish. Again understand the business and prepare the proper Purchase Agreement.

Each business is so unique. No 2 are the same. Even in a specific franchise system, no 2 are the same. It is important for the Broker and the Buyer to fully understand the subject business so the Broker can incorporate all the necessary terms and conditions into the Purchase Agreement to protect his client or clients.

Failure to leave out specifics in the Purchase Agreement usually leaves someone exposed. There could have been some verbal understanding but it was not in writing in the Purchase Agreement. I have had instances where a seller does not want to include a certain piece of equipment in the sale and others where art on the wall was not included. Spell it out up front then there will be no misunderstandings. Small understandings can lead to killing a deal, large misunderstandings can lead to lawsuits.


Categories: BizBen Blog Contributor, Deal And Escrow Issues, How To Buy A Business


Lee Petsas
Areas Served: Southern California
Phone:  714-363-0440
Lee Petsas has been selling businesses with UBI Business Brokers in Southern CA since 1981. In 1999 he became the Owner and Broker for UBI. He has been approved multiple times by Courts as an Expert Witness in the area of Business Valuations.

Comments Regarding This Blog Post

Whatever "form" is used, ultimately both parties are better served if there is an attorney review of the contract before it becomes final. Most business transfers do NOT warrant the time, complexity, and expense of a custom-drawn contract, despite what many lawyers may try to justify. However, each transaction is unique and a proper attorney review could result in one lawyer or the other proposing a few pertinent additions or modifications to the form contract.

As a Realtor, I sell both property and businesses, and so it helps to have access to the Multiple Listing System Service (MLS). The (CAR) forms can be intimidating because of their length, but as Lee said, some of the items in the contract do not always apply, because different businesses require specific things that need to be investigated in the due diligence period. One of the positive items of the (CAR) forms is that is says buyer and seller should go to arbitration and mediation before they can sue each other in court. Many things can be alleviated in arbitration and mediation without getting very expensive lawyers involved. Even though we as brokers are very familiar with our forms, it's important to remember that many of our clients are not, and may be filling them out for the first time, so as brokers we should all slow down and take our time to explain any point of the contract a buyer may have, which could circumvent problems in the future.

Basically, a purchase agreement is a "contract" -- a very specific legal term meaning a "meeting of the minds." And, technically, the written purchase agreement is in reality only part of the contract, not necessarily all of it. And there are certain essential elements that, if missing or ambiguous, mean that there is no contract at all: terms such as price and subject matter. There are implied and inferred elements that become part of the contract, as well as verbal/oral statements, statutory and regulatory provisions included as a matter of law, possibly unverified documents, emails and other written communications, etc. etc.

The purchase agreement must be abundantly clear about what is and is not part of the contract, what can and cannot be added to the contract after the purchase agreement is signed, and what the parties can and cannot rely upon in performing their respective obligations under the purchase agreement.

My contracts include a very clear statement by both parties that they will rely upon nothing -- no verbal/oral statement, no communication, no email or letter, no document, no information of any kind -- unless it is in writing and signed by both parties, and that they agree to sign a statement to that effect on the very day of the closing when the funds and bill of sale exchange hands. In this way there can be no misunderstanding about what was and was not intended by the parties and exactly what was included in the "meeting of the minds."

  Helpful Resources To Assist In Selling And Buying California Businesses
Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Shalonda Chappel-Pilgram: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Helen Yoo, New Century Escrow - Escrow Services In Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Larry Larsen: Laundry Consulting, Brokerage, Insurance

I have over forty years of experience in the sales, ownership, management, and construction of coin laundries. He is a licensed broker active in the sale of coin laundries, a licensed insurance agent specializing in coin laundry insurance. Phone me at 714-630-9274 or 714-630-Wash.

Ralph Santos, Business Broker: Health Care Specialist

Using my MBA and my perseverance I will make things happen! I provide business brokerage niche services specializing in the hospice and home health care agency industry in the Los Angeles County or Ventura County areas. For either buying or selling assistance please phone or email me today.

Chuck Post: Laundry Buyer Representation, Consulting, Due Diligence

I have 32 years experience in the laundry industry, specializing in assisting laundry buyers with buying or starting up, building, re-tooling, laundries throughout CA. Laundry buyer representation, consulting, due-diligence, lease negotiations, laundry valuations. Contact me at 619-227-5711 Cell.

Michael Davidson, Business Broker - Southern California

Los Angeles Business Broker providing M&A quality services for Small Business Owners. We leverage our technology and expertise to Simplify & Expedite the Business Sales Process. Matching the right buyer with the right business is how we define success.

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