When it comes time to consider listing your business for sale, you should consider more closely your lease, supplier agreements and client agreements. There are several issues that can arise and must be resolved to allow for a successful sale. Here are three things to look out for:
Many client and supplier agreements will state that the contract is not assignable to another party without the express written consent of the parties to the agreement. If a buyer for your business wants an asset purchase, which is common as this is usually the safest way for a buyer to proceed from a liability standpoint, it will mean that written consent will be necessary from the other parties of any non assignable contracts.
If you don’t think your clients/suppliers will be amenable to a new owner, it may be better to strongly encourage a share sale. This way, assuming that you have a corporation and that the corporation is on the relevant contracts, there will be no need for assignment as the buyer will come to own your corporation. That being said, some contracts go even further and terminate themselves if either side experiences a change in ownership. At that point, there is no easy way to effect a seamless transition, and permission from clients/suppliers will be needed. Note that there are tax implications when it comes to the question of a share versus an asset sale, but I will address that in another future piece.
Lease Use Clause
Most commercial leases have a Use Clause, which is a critical clause that identifies what type of business, including the products and services that can be offered, that may be operated from the leased premises. Use Clauses exist in part to prevent similar companies/competitors from sharing nearby spaces and cannibalizing each others’ sales. It will be important to ensure that your Use Clause accurately describes the business you are running, as we at VR have run into instances where this was not the case. Sometimes businesses evolve and no longer fit the constraints of the original Use Clause, but the landlord and tenant fail to notice and resolve it. If that occurs, contact will need to be made with the landlord immediately to attempt to resolve the issue, if it is possible. It may be considered a breach of the lease, so it is important to resolve it as soon as it comes to your attention.
Clarity of Terms of Payment and/or Levels of Completion
For many service-based companies, and especially those involved in long term construction projects, payment under client contracts is made as the work is completed rather than in a single lump sum. It is important when contemplating selling such a business to ensure that the terms of payment and the corresponding completion points are clearly defined. This is because a buyer will always be very careful to ensure that, at the date of closing, the total price is adjusted to accurately reflect the exact level of completion of the project. If any terms are unclear, it is recommended that they be addressed before buyers are brought to the table.
There are many issues that can arise with the existing contracts of a business for sale, which is another reason why having a skilled business broker on your side, along with your lawyer, will help you divest from ownership safely.
The preceding commentary is not intended to constitute legal advice.