When drafting a contract, they look complicated but are actually very simple. There are five or six essential points you have to determine. One, the parties to the contract; buyers and sellers. If you’re the buyer, you have to determine the vehicle that you’re going to use to buy the business. A practice that we use is, that when we buy a business and we are entering into a contract, we usually advise our buyers to sign the contract as a nominee for an entity to be formed later. This way you don’t have to go into the expense of setting up a company or a corporation or a limited partnership without knowing your deal is in place.
The next thing you have to determine is the price. More importantly than the price, you have to determine what you’re buying. You have to determine the elements of equipment, leasehold. Once you’ve determined that, then you’ve got to determine the price. Is the price fair?
The next thing you have to do is to determine whether or not the value is appropriate, whether the price is fair. You can do your due diligence which allows you to examine books and records.
The next thing you have to determine is whether or not liabilities of the seller will not flow to you. For example, if you’re buying a retail business in New York, there is a sales tax liability that the state requires has to be paid. And there’s a unique feature about New York law that the buyer is responsible unless he does certain things when he buys the business: Notify the sales tax bureau, determine what sales taxes are due, and to set up an escrow account to hold back some money in connection with the purchase to ensure that all taxes are paid.
When you’re a seller, it’s important for you to determine what the credibility is of the person who wants to buy your business and you have to value what you’re selling. And basically, that should be the things you should consider. Most of the other issues in a contract are collateral issues but as long as you know who you’re selling to, how much you’re selling it, what you’re selling, I think you’re fine. You then have to determine how the purchase price is going to be secured and paid.