However, there is a great deal of behind the scenes work that must also be done -- and can significantly effect the negotiations. Many extremely thorny legal issues must be considered in depth, and the results of the review of these issues may lead to changes in purchase price or deal structure.

As described in Part One of this series, sales of corporations tend to revolve around the question of whether the deal will be structured as a sale of assets or as a sale of stock. All things being equal, buyers will prefer an asset sale (the buyer can "step-up" the value of assets and can pick and choose between assets), while the seller will prefer a stock sale (it relieves the seller of future liabilities, and avoids the dreaded "double tax" scenario).

This assumes that all things are equal. Of course, as we know, all things are rarely equal, and many factors may swing the balance of the deal toward an asset or stock sale arrangement. One of the most important issues to consider in a business sale is the assignment of contracts.

Contracts that are purchased as part of an asset sale of a corporation must permit assignment of those contracts without consent. If they do not permit assignment without consent, then consent must be obtained. This can lead to significant additional work as well as risk to the buyer.

Contracts that commonly are issues in sale negotiations are commercial real estate leases, contracts with employees, and contracts involving business relationships.

Leases
The asset sale of a business can create a golden opportunity with respect to a company's lease of commercial space. If the seller has a below market lease, the buyer may be eager to hold onto it. Alternatively, the buyer may want to try to realize the built in value of the lease by sub-leasing the space or turning it back to the landlord for a termination fee.

Conversely, if the lease is an expensive one, or if the buyer and seller are using the sale to consolidate back office operations, they may want an excuse to attempt to break the lease. A more generous lease can represent a major savings for the buyer, and the cost or benefit of assuming an above or below market lease can be a bargaining chip in price negotiations.

Employee Contracts
While an employee whose contract is transferable will be required to work for new ownership, it is generally not a good idea for a buyer to simply rely upon such contractual clauses. Employees, unsure about their status under new ownership, are much more unpredictable than office space.

It behooves a new employer to sit down with the company's most valuable employees and communicate his or her vision of the business to them. Barring this, the selling party should explain the transition to the employees before negotiations are finalized. A deal can go sour if a substantial number of top employees express unwillingness to work with the new owners. Without experienced people, the transition between owners will be much more costly and time-consuming, and could even cause the business to fail.

Employee-related contracts that may come into play go beyond simple employment agreements, and include stock options and benefit/retirement plans, as well as consideration of whether or not the employees are subject to restrictive covenants and/or confidentiality agreements.

Contractual and Non-Contractual Business Relationships
Many corporations have a few contracts with clients or customers that supply most of their revenue. For instance, if the corporation in question was a contracted food vendor to sports stadiums, the buyer would want to be positive that the contracts with the stadiums or teams could be assigned without consent (or that consent could be obtained). Without these contracts, the buyer would not have a viable business, just a lot of peanuts and Cracker Jack.

Contractual business relationships will vary from industry to industry. A company that licenses rights to produce brand name or special interest products (like Star Trek mugs), needs to retain those licenses to remain competitive. The licensor may try to use a contract assignment to reopen the license to bidding. Similarly, if a company has a franchising arrangement, the franchiser will probably have the right to approve any ownership changes.

While the above shows that the issue of effective contract assignment is as much about business considerations and legal considerations, many of the legal concerns can be limited by structuring the sale of the target corporation as a stock deal.

In a transfer of stock the target company remains intact, albeit under new ownership. As such, the legal entity that is the party to the contract continues, and the general rule is that the contract simply remains in force between its original parties. No assignment occurs and no consent to assignment is needed.

However, this is not always the case. Some contracts state that a change in ownership of the company is considered an assignment of the contract. If such an arrangement is stipulated in the contract, the same issues will arise as with an asset deal.

Before advising on the structure or viability of a business deal, an accountant must conduct due diligence on all of the selling company's contracts. Only then can he or she make an informed recommendation about deal structure and purchase price.

First published on June 26, 2000.