Key Contracts

April 13, 2006

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One issue you should examine closely, when you sell your business, is the transferability of your key contracts.

Ideally, your most important contracts, including leases and contracts with customers and suppliers, should be assumable by the buyer. That way, you can get out from under the contract, and the buyer will have the resources needed to conduct business. If important contracts are not assumable, it will affect the buyer's willingness to buy your business since the contracts will have to be replaced or renegotiated. If your business is organized as a corporation, selling stock, rather than assets, can solve the assumption problem since most contracts were probably made with the corporation rather than you personally. This is one reason some buyers may agree to or even prefer a stock sale.

If you rent your facility, try to get your landlord to sign a new lease with the buyer, rather than having you sublet to the buyer. Generally, a sublessor (which would be you) remains liable for the rent if the sublessee doesn't pay, for the duration of the lease.

The assignment of existing loans on the business can be a problem, if you had made personal guarantees to the lender. You don't want to be personally liable for the buyer's success in the business. If you can't get the bank to release you from further liability on the loan, you'll need to make sure that the cash paid at the time of purchase is sufficient to pay off such loans.