Selling an on-going business involves many steps and must be thoroughly evaluated before signing a sale agreement. One key issue that must be addressed is distinguishing the sale of the business itself versus any real estate associated with the business. If the seller is selling both the business and the real estate, then these are separate transactions that must be addressed in separate sale agreements.
The sale of a business typically involves the sale of inventory, furniture, fixtures and equipment, a client list, customer contracts, the business name and any goodwill, all licenses, permits and leases of the business, and other such assets. The sale may involve the buyer assuming certain business liabilities and possibly hiring certain employees. The seller may agree to a covenant not to compete and may also provide consulting services to the buyer post-closing. The parties may want to conduct a bulk sale transfer (which will require establishing a business escrow) to insure that the buyer gets clear title to all the business assets. In addition, if a liquor license is being transferred, then the California Department of Alcoholic Beverage Control (“ABC”) requires a separate business escrow to transfer the liquor license.
The sale of real estate involves not only the sale of the real estate itself, but also any leases and other rights associated with the real estate. The buyer will conduct a due diligence investigation into the real estate, which may involve a survey and/or environmental site assessment. The seller and buyer will open a real estate escrow with a title company, which will issue a preliminary report about the condition of legal title to the property and all encumbrances against the property. The buyer will have a due diligence period to evaluate the property and decide whether to proceed with the purchase. The title company will issue a title insurance policy to the buyer at the closing.
In this situation, the parties will need to enter into separate purchase agreements, one for the business and another for the real estate. They will need to allocate the purchase price between the business versus the real estate. Each party will have distinct duties and obligations in each purchase agreement relating to each sale. The parties can make closing the business sale contingent on closing the real estate sale, or vice versa. Sometimes, that may not be possible as the closing date may be subject to various factors. For example, the sale of a business with a liquor license is deemed to close on the ABC transfer date of the liquor license. As such, the parties may need to negotiate for some interim arrangement if they are unable to close both sales on the same date. Each party will need to retain its own legal counsel to advise them on these issues.
This article is written by Patrick Casey, who is a business attorney with the JRG Attorneys at Law firm in Monterey. You may reach the author at (831) 269-7114 or at patrick@jrgattorneys.com.
Meet the Author
