This blog series explores the steps involved in buying and selling a business, which tend to be much more complex than many business owners realize. In prior blog posts, I explained how due diligence comes into play, the nature of due diligence requests related to the structure of the business entity that is selling its assets and to financial information, and due diligence as it relates to the seller’s customers. In this post, I will discuss an aspect of the purchase and sale process that often creates confusion – contracts.
In my previous discussion about due diligence as relates to the seller’s customers, I wrote: “Although some business owners assume the contracts automatically ‘go with the business,’ in reality, legal documentation is generally required to assign the contracts. Additionally, the purchaser will want to examine the contractual agreements to ensure that the purchaser wants those contracts to be assigned. It may be that the contracts are not well written, or are not feasible from a business perspective.” As part of the due diligence process, an informed purchaser will want to review all of the seller’s current contracts, not just the contracts related to customers. These agreements might include advertising agreements, employment agreements, independent contractor agreements, rental agreements, agreements related to advertising and promotion, license agreements, security agreements related to assets, loan documents and agreements, agreements with vendors, agreements with business partners, acquisition agreements, management agreements, franchise agreements, construction contracts, confidentiality agreements, non-competes . . . . The list of potential agreements is endless.
These agreements frequently create confusion because they generally involve third parties. How is that confusing? Let’s say that ABC, Inc. seeks to buy Acme, LLC. Acme, LLC has a contract with a key vendor, Office Ubiquitous, Inc. Because this vendor contract is integral to Acme, LLC’s business,, the transaction may not solely be determined by what ABC and Acme decide. Depending on the terms of the vendor agreement, specifically its language concerning assignment and termination, Office Ubiquitous might well have a say on how its contract is assigned from Acme to ABC, or whether its contract is terminated as part of the transaction.
Each applicable contract may, and probably will, have different contractual language in regards to assignment and termination. Each contract will need to be individually reviewed in its entirety by a lawyer. The terms of that contract will need to be followed regarding termination and assignment. In my example, that may involve extensive and time consuming negotiations and documentation from Office Ubiquitous’s attorneys. Depending on the volume of contracts involved, this process of assignment or termination tends to increase both the cost of the purchase and sale transaction and the period of time necessary to facilitate the transaction prior to closing. The parties in the purchase and sale process often underestimate how involved this process of contract assignment can be.
In my example, ABC and ACME may be committed to closing their transaction by a certain date. But, Office Ubiquitous isn’t bound by that date, and may not see a need to rush to ensure the closing date is successfully achieved.
My next blog post will continue to discuss due diligence.
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