What Assets Are Included in the Typical Business Sale?

What Assets to Include in Business Sale?

All business owners should be aware of what to expect when it comes time to sell their business.  A key aspect of what to expect includes understanding what is or is not included in the sale. This way the seller will be armed with the correct knowledge and expectations during the negotiation process, thus resulting in the best possible purchase price while avoiding any unpleasant surprises. As a general rule of thumb, all of the assets owned by the seller’s corporate entity is included in a sale with the exception of inventory, cash, and account receivables.

Corporate Entity Typically Not Included in Business Sale

  • Most business sales are called asset purchases.
  • That is why the typical business sales contract is titled an ‘Asset Purchase Agreement.’
  • In an asset purchase deal, the buyer forms their own corporate entity (such as a corporation or a Limited Liability Company) and purchases the assets (both tangible and intangible) of the corporate entity which is selling the business.
  • The seller’s corporate entity is usually abolished after the closing, and is not purchased by the buyer or included in the sale.
  • The usual buyer will not want anything to do with the seller’s corporate entity because of the possible legal, tax, or business liability and as such it is not included in the deal.
  • In a stock purchase deal the buyer does purchase the seller’s corporate entity.
  • It does by purchasing the shares or membership interests of the corporate entity, thus becoming the sole shareholder or managing member.
  • The ‘doing business as’ name of the business (which can be a fictitious name) is typically included in a business sale as part of the intangible assets that is owned by the seller’s corporate entity.

Cash/Account Receivables Often Not Included in Palm Beach Business Sales

Generally speaking, all of the physical assets and intangible assets are included in the sale, subject to any exceptions as outlined in the governing purchase contract. Typically the cash and accounts receivable (money owed to the business for services previously rendered) of the business – part of the working capital of the business-  is excepted from being included. Simply put, the buyer is simply expected to incur their own working capital needs and the seller expects to keep what he or she rightfully earned from the business.

Parties May Need to Negotiate Disposition of the Cash/Account Receivables

In some instances, the buyer may request or even insist that the cash or account receivables remain with the business after the closing. Indeed, in stock purchase deals, such assets legally remain with the seller’s corporate entity (which thus becomes the property of the buyer) after the sale. The parties may thus need to negotiate the disposition of the cash and accounts receivables in the sales contract. This is often the case in the sale of healthcare companies, where there is often a high amount of account receivables.

Inventory Typically Not Included

  • A company’s inventory (raw materials or goods available for sale) often is a major component of the value of a business, especially with retail-related businesses.
  • In such instances, the inventory is usually not included in the asking price of the business.
  • Rather, it is sold separately (concurrent with the sale) and the value is jointly determined by the buyer and seller immediately before closing.
  • In the sale of a convenience store, for example, the business itself may sell for $100K but the inventory may sell for $50K.
  • In such instances, the inventory is separately valued ‘at cost’ rather than for its retail value.

Free Training Typically Included in the Business Sale

In many businesses, the owner’s role is of critical importance to the success of the business. As a part of what is included in the asking price, most sellers offer to give around 30 days of free training to the buyer after the closing. The free training period typically take place during normal business hours. Free training from the seller is a way to effectuate a smooth transition and handover to the buyer after the sale.

After Free Training Period, Seller Must Get Paid

After the free training period expires, the buyer may want the seller to continue working in the business. If a seller’s role is truly instrumental in the business, then a buyer will be especially keen to keep the seller around for as long as possible. In such a case, the buyer will need to hire the seller on mutually acceptable payment terms. This employment agreement may or may not be fleshed out ahead of time in the purchase contract. It all depends on what the buyer desires. But in no circumstance should any seller be feel obligated to work ‘for free’ after the free training period expires.

Above all else, both parties to a business deal should have a meeting of the minds on what exactly is or is not included in the deal. The purchase agreement should reflect these terms in detail so there are no surprises or misunderstandings.

Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.