Using A Letter Of Intent For Purchasing A Company’s Assets In Texas
The buyer and the seller in a business purchase agreement will often engage an attorney to assist with a letter of intent (sometimes called a letter of interest or “LOI”) prior to drafting a company agreement. After the parties sign the letter of intent, the potential buyer and seller should begin to negotiate the purchase agreement relating to the acquisition of the Assets. A letter of intent is not or should not be a binding contract. It is used to outline the anticipated terms of the agreement to be drafted by counsel of either the buyer or the seller. The Asset Purchase Agreement would include the terms summarized in the letter and include other representations, warranties, conditions, covenants, indemnities and other terms for the benefit of both parties. As part of the Asset Purchase and Sale Agreement, the parties shall also commence to negotiate ancillary agreements. These typical agreements may include: (i) an escrow agreement, (ii) a bill of sale, and (iii) an assignment and assumption agreement. Does the Seller require initial deposit or earnest money? Will it be refundable if you are able to terminate the purchase agreement during your due diligence period?
The letter of intent and the Asset Purchase Agreement should identify the assets and the purchase price. The purchase price for the Assets should be stated in the agreement in dollars and defined as the “purchase price.” Payment methods vary. Therefore, an amount may be payable at the closing of the transaction and another amount may be deposited with a mutually agreeable escrow agent to be held for a period of time after the closing. This is done in order to secure the performance of the seller’s post-closing obligations under a clear contract. At the closing of the purchase transaction the buyer would acquire substantially all of the assets, and certain specified liabilities of the Business free and clear of all encumbrances.
Buying a Company’s Property and Its System for Operations
If you are purchasing the assets of a company, the company or participating in a franchise agreement, you should examine the company’s system for developing and operating the business. A company’s system may include: (1) methods, procedures, and standards for developing and operating the business, (2) plans, specifications, equipment, signage and trade dress for the business, (3) particular products and services, (4) the marks used for branding, (5) training programs, (6) business knowledge, and (7) marketing plans and concepts.
As part of the system, you should be aware of system standards existing at the time of the purchase. System standards are the mandatory procedures, requirements, and/or standards of the system as determined by the business (sometimes documented), which may include any procedures, requirements and/or standards for appearance, equipment, inventory, marketing and public relations, operating hours, presentation of marks for branding, product and service offerings, quality of products and services, reporting, safety, and technology and uniforms.
Purchasing Intellectual Property of the Business
The business purchaser will typically purchase all intellectual property and marks needed for branding purposes. A potential concern is that seller of the marks and copyrighted material may not be the owner of the copyright. Many times a business will hire a branding company that will design marketing images, marks and branding in addition to included words or slogans. Copyright laws indicate that unless the business purchased all copyrights from the artist or designer, the art will remain the property of the artist. Therefore, as part of your due diligence for the purchase of the business and its marks, I recommend obtaining copies of the purchase agreement or the assignment document that conveys the copyright of the art to the business.
If you are purchasing a business consider including a non-compete agreement. If you are purchasing a company or its assets, then you should consider implementing an agreement that the seller shall not compete against you within a particular territory.
In addition, the buyer should make sure that the Seller does not work for a competitor or act as a consultant to any other company that is a competitor.
As part of the purchase the buyer should determine who has control and ownership over the business that the buyer is acquiring. I recommend that the seller identify each owner, officer and director of the business and describe the nature and extent of each owner’s interest in the business for sale. If several individuals have control or involvement with the business and will be receiving a portion of the sale proceeds, the non-compete agreement should extend to them as well.
Due Diligence in an Asset Purchase and Sale Agreement
The buyer of the business should confirm and require that the seller represent in an agreement that the business and each of its owners (i) are not violating any agreement (including any confidentiality or non-competition covenant) by entering into or performing under the purchase and sale agreement, (ii) are not a direct or indirect owner of any competitor, and (iii) are not listed or “blocked” in connection with, and are not in violation under, any anti-terrorism law, regulation, or executive order.
Along the same lines, the buyer should research all review and reporting websites and outlets like the Better Business Bureau, Yelp, and Google business listing reviews.
The buyer should secure an agreement from the seller that will authorize its management to allow the buyer and its advisors full access to the facilities, records, key employees, customers, suppliers, and advisors of the Business for the purpose of completing the buyer’s due diligence review. The due diligence investigation may include a complete review of the financial, legal, tax, environmental, intellectual property and labor records and business contracts.
Examine contracts owed by the business prior to purchase. Determine if they allow successor agreements. For example, the business may own a service, license or vendor contract that may soon expire. It is good to know if when the term of the agreement expires, the business may enter into a successor agreement for additional periods that may be for several years each. Determine if the contracts have certain conditions prior to each renewal like the requirement for (i) the business to notify the other party of the election to renew within in a certain period of time. For example, renewal terms are often 90 and 180 days prior to the end of the term; (ii) Business (and its affiliates) are in compliance with the contract in order to avoid potential forfeiture of renewal ability; and (iii) the business and each owner to enter into an indemnity agreement for the other party, its affiliates, and their respective owners, officers, directors, agents and employees. You may disagree with indemnification terms.
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