You are buying a business. You have begun negotiating with the seller and have agreed to a purchase price for the assets of the business and some general terms. Maybe your seller gives you an agreement to review or maybe you will have your attorney draft an agreement for you. Either way, you should require these three things be included in that agreement.
- Classification of Assets: What you are buying and how those assets are classified for tax purposes have consequences. Your seller may want to allocate the purchase price as much as possible to “Blue Sky” or “Goodwill” because that allocation will be treated as capital gains and not a recapture of depreciation on fixed assets. You, on the other hand, may want less of the purchase price allocated to Goodwill so as to take advantage of depreciation opportunities on the assets you purchase. However the assets are classified, it is important that the agreement include a detailed description of how the sale of the assets will be reported by the buyer and the seller for tax purposes. Before you sign the agreement, you should have a clear understanding of the anticipated tax consequences of the purchase.
- Indemnification: You should require that your seller agree to indemnify, save and hold you harmless from and against any claim, liability, loss, damage, cost and expense (including, without limitation, attorneys’ fees and other legal costs and expenses) arising out of any breach of warranty, third party claims, obligation or nonperformance by the seller. In other words, you should require the seller to agree to compensate you for a loss that you incur from something that is the seller’s responsibility that comes up after the closing.
- Non-Compete: You should also include that the seller will not compete against you in the same kind of business. Even if your seller assures you that she has no interest in engaging in a business that would compete against the business you are buying, get that agreement in writing. Also make sure your non-competition and continuity of business agreement includes details of how long the seller will not compete with your new business and a reasonable geographical limitation.
Your asset purchase agreement should be detailed and include provisions that pertain to several different elements of the agreement. Make sure you have an attorney draft or review your asset purchase agreement with you so that you understand the details of your transaction.
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