Buying and Selling a Business (Part 2)
Keith Wasserstrom
November 08, 2005

Buying and Selling a Business (Part 2)

By Keith Wasserstrom

In Part 1, we discussed structuring the purchase price for the sale or acquisition of a new business. We discussed the difference between using cash and using debt to buy a business. We pointed out that a seller would prefer all cash, so that she or he need not worry about collecting the entire purchase price. Also, in a debt transaction, the seller remains at risk because, if the company fails, the buyer would not want to and may not be able to pay off the debt. This could be tragic for a retiring seller who was counting on the proceeds of the sale to finance his or her retirement. Most sellers do not want the sleepless nights worrying about the buyer's ability to run the business successfully.

Buyers prefer holding back some portion of the purchase price, either in the form of debt or some other holdback or escrow. Although buyers are willing to take the risk that they personally can successfully operate the business, they are not typically willing to take the risk that the seller misrepresented the performance of the business. The holdback is their insurance policy against such misrepresentations. Without the holdback, the buyer would have to sue the seller to collect from the seller.

The next consideration in negotiating the terms of a purchase agreement is the covenant not to compete. If a seller has a great reputation in a certain business, it would be detrimental to the buyer for the seller to open a competing business across the street following the sale. Therefore, buyers typically demand that the sellers agree not to compete with the

buyer's business for a certain period of time covering a certain location near and around the old business. If the covenant not to compete is overly broad, either in time or location, then it may not be enforceable. Therefore, competent legal advice should be sought when drafting these provisions.

Along with a covenant not to compete, confidentiality and non-solicitation clauses are also common. The former provision requires a seller to keep the business's trade secrets and proprietary information, including, for example, customer lists, business strategy and recipes, confidential. The latter prohibits the seller from soliciting or trying to hire or attract any of the employees, customers or business contacts of the seller's old business.

Before negotiations even begin, the seller should have a prospective buyer sign a confidentiality agreement where the buyer agrees not to disclose any of the seller's confidential information which the buyer will come into contact with during the buyer's due diligence of the business. The prospective buyer should agree never to use any confidential information to the detriment of the seller. Similar provisions should be included in the purchase agreement because, even though the agreement gets signed, the transaction, for many reasons, may not close, in which case the sale is not consummated.

About the Author:

Keith Wasserstrom is a founding partner of Wasserstrom, Weinreb, & Wealcatch in Hollywood. e-mail keith@corporatecounsel.com or visit the firm's Web site at www.HollywoodCounsel.com.