Legal Blog

You Finished the LOI- Now it’s Time to Pay Attention to the Details

You have been negotiating the key business terms of a business purchase for months and finally, a letter of intent is signed.  While the signing of the LOI is a key stage of the acquisition process, a crucial part of the process still remains – the negotiation and execution of the purchase agreement, which contains a myriad of provisions that, on the surface, seems harmless, but that in reality, can have a huge impact on you as purchaser of a business. You have heard the sayings, “the devil is in the details” or “it’s the little things that count.”  These sayings apply equally to purchase agreements.  This blog is the first of a series that will delve deeply into issues that you need to be aware of when negotiating the purchase agreement. Who Signs on Seller’s Side – Your acquisition may be structured as an asset purchase from a company that is incorporated.  In addition to agreeing to sell the assets of the company to you, the seller will make core representations and warranties regarding the finances and operations of its business.  It is not sufficient to have just the selling entity sign the purchase agreement.  The owners of the selling entity must also be bound by all of the representations, warranties and agreements of the seller.  Otherwise, after the acquisition, the seller could distribute the entire purchase price to its owners.  If you suffer post-closing loss that relates to a pre-closing item, you would have only the empty seller entity to recover the loss from.  The seller’s owners must sign on. Non-Compete – The purchase agreement typically states that the seller and its owners will not compete with the purchaser for a designated period of time within a designated geographic area.  Much attention is usually devoted to the negotiation of the specific activity that the seller will be prohibited from engaging in, the timeframe and the geographic area.  A non-compete agreement that adequately covers these areas protects the purchaser while it operates the business.  Often overlooked, however, is the future, when the purchaser itself may want to sell.  It is important that the non-compete agreement be able to be assigned, or transferred, by the purchaser to another entity.  This way, the purchaser will be able to offer its later buyer the comfort that the original owner/seller is still bound by the non-compete.  The laws on this issue vary state by state.  Some states do not allow the assignment of non-compete agreements.  Some states allow the assignment, but only if the purchase agreement specifically states that the non-compete agreement can be assigned.  As you can tell, this is an extremely important issue that must be examined at the time of the purchase. Bulk Sales TaxOne money issue often not dealt until the negotiation process is far along is sales tax.  Several states impose sales tax on the sale of certain assets sold as part of the sale of a business.  Not all assets are subject to sales tax and not all states impose a sale tax on a business purchase transaction.  Many states, however, do impose a sales tax, including New York and Maryland.  In Maryland, the sales tax rate is 6 percent.  The most typical purchased asset that is subject to sales tax is furniture, fixtures and equipment.  When negotiating the allocation of the purchase price among the assets being purchased, consideration must be given to the sales tax.  It may be beneficial to a purchaser to allocate more of the purchase price to furniture, fixtures and equipment, to allow for greater depreciation expense.  The cost of that could be higher sales tax.  In any event, whether the buyer or the seller pays the sales tax, or whether the sales tax obligation is shared, is an important money issue in the negotiations. My next blog will discuss “boilerplate language” in purchase contracts and why that language is important. If you have any questions regarding a letter of intent or mergers and acquisitions please contact Glenn D. Solomon Esq. at: Business Lawyer Glenn D. Solomongsolomon@offitkurman.com | 443.738.1522 Glenn D. Solomon Esq., is a principal at the law firm of Offit Kurman and has represented clients in preference actions all across the United States. Mr. Solomon has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businesses, structuring ownership agreements, advising companies in financial distress and bankruptcy preference avoidance actions. You can also connect with Offit Kurman via FacebookTwitterGoogle+YouTube, and LinkedIn