Putting Everything Together and Closing the Transaction

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- The "Right to Set-Off" clause is used frequently when the seller finances a part of the selling price of the business. This is often used when the buyer and seller agree to "Waive the Bulk Sale Act". The Bulk Sale Act requires that the buyer notify all known creditors of the seller advising them that the business is being sold. The creditors now have a chance to make a claim, if any, for amounts owed to them by the seller. This can often take a long period of time. In many cases, the buyer may not want to alert the creditors that a sale is in the works, not because there is any intention of not paying the creditors but simply because they do not want to upset any relationships and credit lines they may have established. Therefore, more often than not in small business transactions, the Bulk Sale provision is usually waived or not complied by the parties. If there is no compliance, it could prove extremely fatal for the buyer since he will be responsible for the debts left behind or overlooked by the seller. To protect the buyer against such claims, the right to set off is used.

Here is an example of how a bulk sale waiver would work. Let's assume that, after the sale is consummated, a creditor asserts a claim against the business, and that claim was determined to be due during the time it was owned by the seller. Technically, the buyer would be responsible to pay the creditor, but because the buyer has the right to set off, the buyer will use the sellers note payment and pay the creditor with the sellers money. Without this provision, the buyer will have to sue the seller to recover any monies.

ALLOCATION OF PURCHASE PRICE - One item that is often omitted in business sale agreements, perhaps because it is not absolutely necessary, is a provision in the agreement that spells out how the parties agree to allocate the purchase price between the various acquired assets. While this is now of a somewhat lesser importance for tax purposes than before the Tax Reform Act of 1986, it can still be quite important in certain situations.

The '86 Act requires both the buyer and seller to abide by an allocation formula based on the fair market values of the cash, securities, and other assets such as land, improvements, equipment, inventories, and intangible assets (such as patents, trademarks etc.). Any excess of the purchase price over the sum of those values MUST be allocated to "goodwill" or "going concern" value, which is an intangible asset that cannot be deducted, depreciated or amortized by the buyer. Seek to minimize allocations to land value, and Liquor or beer licenses, since these are also not deductible for income tax purposes.