Buying an old business can bring exciting opportunities for the company or individual who is making the purchase. However, anyone who has been in business long enough can appreciate how complicated these deals can be. There is a great deal of negotiating and due diligence to conduct with respect to the target company. One particular area of concern for the acquiring business is what becomes of the old company’s contracts. If you’re ready to buy a business, you need to fully appreciate the potential risks along with the opportunities.
What Are Some Common Business Contracts?
You will likely have to deal with contracts that govern both the internal and external relations of the company you are buying. A few common examples include:
- Employment contracts
- Non-compete agreements
- Non-disclosure agreements
- Confidentiality agreements
- Leases and other real estate contracts
- Loans and finance agreements
- Shipping and third-party vendor contracts
- Parts and supplier contracts
- Construction contracts
And there could be many more, depending on the nature and size of the company you are acquiring. An attorney can assist in making sure you know exactly the nature of these contracts before you decide to buy the business.
How Should the Business Deal be Structured?
Depending on how the purchase is structured, the acquiring business could take on every liability of the old company (including contractual obligations) or only certain ones. Before making the deal, the old business may agree to settle some or even all of its ongoing contractual duties, or in many cases the deal will require that the seller settle certain contracts with the proceeds of the purchase. This could mean anything from paying the rest of the contract price to negotiating a buy-out agreement with the other parties to the contract. Whether and to what extent the previous owner will settle these contracts will be a point of discussion as the deal progresses.
There’s a good chance, however, that all existing contracts won’t be satisfied before the purchase of the old business is complete. The structure of the transaction then becomes particularly relevant. If the new business goes the route of an equity purchase, all liabilities (except those contractually agreed to the contrary) will usually become the responsibility of the new owner. The same can happen if two existing companies merge to form a new one.
In an asset purchase, the buyer can choose which assets to take and which to leave behind. This means that only those liabilities (e.g. contracts) which are specifically agreed to will transfer to the new owner. Everything else will remain the continued responsibility of the old owner.
What is Third-Party Consent ?
One potential wrinkle in your deal could be contained in the existing contracts, which may require the other parties to consent to transferring ownership of the contract to a new business. This may not be as much of a problem in an equity sale or merger, depending on the terms of the agreement. Regardless, you will need to review the language in the existing contract to determine whether a third-party consent will be required.
How to Get the Deal Right
Due diligence and close attention to detail are essential components of developing a comprehensive business purchase agreement that fully protects your rights and interests. Your goal is to know the exact value of your deal while eliminating or minimizing any surprises. That’s where our experienced Business & Corporate Law practice is ready to serve you and your organization.