A certain number of papers are a required part of the purchase and sale of a business. One of the most important is the Business For Sale agreement. This document will vary from state to state (or from country to country) depending upon the different laws that oversee the sale of a business, although, every Business For Sale agreement will have common provisions. The goal of a Business For Sale contract is to explain, in detail, exactly what the seller is selling, at what cost, and under what provisions.
Common Agreement Provisions
The Business For Sale agreement will begin with “recitals,” which will include the names of the parties and why the paper is being drafted. There will also be sections that explain the following:
§ How much deposit the buyer will put into escrow, when the balance is due, how any seller financing will be repaid and under what terms.
§ What will happen to employees, and how the change in ownership may change things like retirement plans and other benefits.
§ What assets are part of the purchase and which are not.
§ How existing company debts and liabilities will be handled.
§ A listing of any warranties that relate to the equipment on hand.
§ The contracts and leases that will accrue to the new buyer, plus an explanation of their terms and conditions.
§ How any buyer/seller disputes will be resolved.
Terms to Know
Even for people who have bought many businesses in the past, the importance of understanding the unique language of a Business For Sale contract cannot be exaggerated. Here are a few terms that often show up in a Business For Sale contract, along with some basic understanding of their meaning:
§ Letter Of Intent or LOI- This document will precede the Business For Sale agreement, but it may contain a number of legally binding provisions that carry over into the primary sales agreement; this may include some non-disclosure language as well as a promise to negotiate in good faith. It is the letter of a buyer’s intent to purchase the business and lays out the offer and basic terms of the transaction.
§ Cash flow statement - A report of how much cash a company has flowing through the business over a given time, as well as an accounting of how the money was obtained: from operations, investing, or financing; the purpose of the cash flow statement is to offer information on the company’s fiscal health and its ability to pay bills.
§ Due diligence - This catch-all phrase refers to the work a prospective buyer goes through in order to investigate the value of a company; material to be reviewed under due diligence may include balance sheets, profit-and-loss statements, patent filings, equipment leases, and so on.
§ EBITDA - This acronym stands for “earnings before interest, taxes, depreciation, and amortization.” EBITDA proves useful in the ability to compare one company’s value against another’s by eliminating how different financing or accounting methods may skew an accurate comparison; it essentially levels the playing field for firms that are heavily invested in expensive assets that are subject to long-term write-offs.
§ FF&E - These initials stand for “furniture, fixtures and equipment, referring to hard-asset items that are likely to be included in the sale of a business; even though these items are subject to steep depreciation (just imagine how much a PC bought in 1999 is worth today), understanding the value of FF&E is a vital part of comprehending the value of the company.
§ Seller’s Discretionary Cash Flow (SDCF) or Seller's Discretionary Earnings (SDE) - While knowing a company’s net earnings will help a buyer understand its potential profit, oftentimes owners will pay for things through the company rather than personally due to tax-deductible considerations. By adding back to the bottom line such items as interest paid, the cost of a cell phone, or vehicle lease payments (things the new buyer may not pay), one will arrive at the company’s SDE; this is a more accurate assessment of how much money a business has earned.
