Buying or Selling a Small Business

If you're buying or selling a business, there are several key terms that you'll want to cover in the sales contract:

• Financial Terms. The parties need to agree not only on the sales price, but also on the terms of payment. A buyer sometimes pays the entire price upfront. It's more common, however, for a buyer to make a down payment followed by installment payments. In that case, you'll want to spell out the payment schedule for the installments, as well as the interest rate (if any) that the buyer will be paying.

• Structure of the Deal. Sometimes the buyer will be taking over the seller's legal entity, such as a corporation or limited liability company (LLC). Other times the buyer will simply buy assets from the seller's entity. These methods have different legal and tax consequences. Whether you're a buyer or seller, you need to understand the nuances of the two methods in choosing which route to follow.

• Allocation of Assets. In an asset purchase, the parties should allocate the sales price among various asset classes. This will affect how quickly the buyer can depreciate the assets being purchased. It will also determine which part of the seller's profit on the deal will be taxed at ordinary tax rates versus the long-term capital gains rate.

• Liabilities. The sales contract should define which, if any, of the business liabilities the buyer will be responsible for.

• Limitations on Seller's Future Activities. In many situations, the buyer will want to limit the seller's ability to compete with the business once it changes hands. This means the parties will need to negotiate the terms of a covenant not to compete.

• Seller's Services. Often, the buyer will want the seller to continue to help run the business - at least during the transition period. And the seller may welcome the chance to continue working in the business and be paid for it. The buyer can agree to hire the seller as either an independent contractor (consultant) or employee. The terms of this ongoing relationship should be captured in the sales contract or in a separate agreement.

Whether you're buying or selling a business, the attorneys at the Ann Arbor firm of Hamilton, London, & Davis can help assure that your interests are legally protected.