Business Transaction Terms
ASKING PRICE – The total amount for which a business or an ownership interest is offered for sale.
ASSET SALE – The means by which a business owner transfers ownership of tangible and/or intangible assets to another owner without transferring the ownership structure.
FINDERS FEE – An amount paid to another party for locating and referring a client or customer.
ADDENDUM – A written instrument that adds something to a written contract.
AGENT FOR SERVICE OF PROCESS – An agent for service of process (also known as the registered agent) is the person or company designated to accept service of process on behalf of the corporation. A defendant must be “served” with court papers, which give the defendant notice, before a lawsuit can have legal effect.
AMENDMENT – A written instrument that changes something previously agreed to. (This is different than an addendum).
ARBITRATION – The submission of a disputed matter for resolution outside the normal judicial system. It is often faster and less costly than courtroom procedures. An arbitration award can be enforced legally in court. If one or more parties cannot agree on a single arbitrator, they can select arbitrators under the rules of the American Arbitration Association (AAA). Arbitration clauses are often inserted into contracts as the forum to settle disputes arising out of the contract.
ARTICLES OF INCORPORATION – A legal document filed with the state that sets forth the purposes and regulations for a corporation. Each state has different regulations.
ASSET SALE – A sale of a business in which the buyer acquires only specific assets (and possibly assumes some liabilities). Unlike a stock sale, the buyer obtains the assets usually free and clear of any liabilities of the seller. The buyer also gets the advantage of a “step-up” in basis on the assets purchased based on their allocated fair market values.
ASSIGNMENT – A transfer in writing of an interest in property or other things of value from one person or entity to another.
ATTORNEY-IN-FACT – One who is appointed, in writing, to perform a specific act for and in place of another, e.g. signing documents for someone in their absence.
BILL OF SALE – A written agreement by which one person assigns or transfers his or her rights to or interest in goods and personal property to another.
BLUE SKY LAW – A blue sky law is a state law that regulates the offering and sale of securities to protect the public from fraud. Unless an exemption from registration exists, registration of all securities offerings and sales, as well as of stockbrokers and brokerage firms, are required. Each state’s blue sky law is administered by its appropriate regulatory agency, and must also provide private causes of action for private investors who have been injured by securities fraud.
BOARD OF DIRECTORS – Those individuals selected to sit on an authoritative standing committee or governing body, taking responsibility for the management of an organization. Members of the board of directors are officially chosen by the shareholders, but in practice they are usually selected on the basis of the current board’s recommendations. The board usually includes major shareholders as well as directors of the company.
BOND – A pledge to pay a sum of money in the event of failure to fulfill obligations; e.g. inflicting damage, or mishandling funds. Usually written by a company for a fee. Also known as a Surety Bond.
BULK SALE – A transfer in bulk of all or substantially all of the inventory and fixtures of a business, which is not in the ordinary course of business.
BULK SALES ACT – Laws enacted by the states to protect creditors against secret sales of all or substantially all of a business’s goods. It requires certain notices prior to the sale and sets forth ways of voiding the sale (see Uniform Commercial Code).
BUSINESS TRADE NAME – Company name by which a certain business is known, could be the official name of the company. See also DBA and FBN.
BYLAWS – The rules and regulations enacted by an association or a corporation to provide a framework for its operation and management.
CAVEAT EMPTOR – “Let the buyer beware”.
CONFIDENTIALITY AGREEMENT – An agreement made to protect confidential information if it has to be disclosed to another party. This often happens during negotiations for a larger contract, when the parties may need to divulge information about their operations to each other. In this situation, the confidentiality agreement forms a binding contract not to pass on that information whether or not the actual contract is ever signed. Also known as a non-disclosure agreement.
CONSIDERATION – Something of value which induces a person to enter into a contract. The promise to do something must be in exchange for some act or thing of value which is the consideration. This is a necessary element in a contract.
CONTRACT – A voluntary and lawful agreement between two or more parties to do, or not to do, something. Elements of an enforceable contract include: (a) an offer to be bound to do or refrain from doing something, which has been accepted, (b) sufficient consideration, (c) a valid subject matter, (d) legal capacity of the parties, and (e) for those contracts to which the Statute of Fraud applies, its requirements must be met.
CONVEYANCE – A transfer of title.
CORPORATION – An entity created by or under the authority of the laws of a state, composed of individuals united under a common name, and which for certain legal purposes is considered a natural person. Characteristics of a corporation include: (a) continuity of life, (b) centralization of management, (c) limited liability, and (d) free transferability of interest.
C CORPORATION – A normal corporation for federal income tax purposes. The entity itself pays income taxes. The profits and losses of the entity do not pass onto the owners.
CLOSING – When all the details of the business sale are completed and the money distributed to the seller, seller’s agents, creditors and others.
CLOSING DOCUMENTS – The legal documents that are part of a business closing. They might include: a definitive purchase contract, promissory notes, mortgage, security agreements, financing statements, subordination agreements, bill of sale, covenant-not-to-compete, consulting agreements, employment agreements, leases, assignments, escrow agreement, releases, tax clearances, director and shareholder consents, legal opinions, environmental opinions, fairness opinions, and IRS Form 8594 Asset Acquisition Statement.
CLOSING STATEMENT – A statement which contains the financial settlements between the buyer and seller and the cost each must pay. They may be on one statement, or the buyer and seller may each receive separate ones.
COMINGLING – When an agent mixes the funds of a buyer or seller with his/her own in a “trust account”. This is against the law in most areas and in most states. Licensed brokers may lose their license because of co-mingling.
CONDITIONAL SALES CONTRACT – Title to the goods, fixtures and equipment or the business itself is not transferred to the buyer, and remains with the seller, until the terms of the contract have been met. This generally means when all the payments have been made.
CONTINGENCY – A clause in an agreement, contract, escrow, etc. that only makes it binding upon the occurrence of a stated event. For example, the sale of the business is contingent upon the buyer obtaining financing.
COVENANT-NOT-TO-COMPETE – An agreement made part of a purchase contract, in which the seller promises not to enter into a similar or competing business, for a specified period of time, within a designated area.
CREDITOR – A person to whom a debt is owed by another person who is called the debtor.
DBA (“doing business as”) – An identification of the trade name of the business, which may differ from the legal corporate name.
DEMAND NOTE – A promissory note that has no set time period for repayment and can be called due by the holder at any time.
DIRECTORS – Those who are elected by the shareholders to manage the affairs of a corporation. Shareholders elect directors; directors elect officers; officers manage the day-to-day affairs of a corporation.
DISCLAIMER – A statement that attempts to limit liability in the event information is inaccurate.
DUE DILIGENCE – The formal process of investigating the background of a business, either prior to buying it, or as another party in a major contract. It is used to ensure that there are no hidden details that could affect the deal.
EARNEST MONEY – A sum of money given to bind an agreement or an offer.
ESCROW – A deed, a bond, money or other piece of property delivered to a third person to be delivered by him/her to the grantee only upon the fulfillment of a condition.
EXECUTE – To complete, to make, to perform, to do, to follow through; to execute a contract; to make a contract: especially signing, sealing and delivery.
FICTITIOUS BUSINESS NAME (“FBN”) – The name of a business other than the incorporate name of the Company. In most areas, this name is filed with a state county or local government agency to be legally effective. Same as Business Trade Name and DBA.
FIDUCIARY – Acting in a relationship or position of trust, usually regarding financial matters or transactions.
FINANCING STATEMENT – A recorded document filed generally in the secretary of state’s office of the state and shows that there is a lien against the fixtures and equipment (personal property) of the business.
FRANCHISE – The right or license granted to an individual or group (franchisee) to market a company’s (franchisor’s) goods or services in a particular geographic territory within strict procedures and rules by the franchisor.
GENERAL PARTNERSHIP – A business entity that is made up of two or more entities to carry on a trade or business. Each partner contributes money, property, labor, or special skills and each partner shares in the profits and losses from the business. All the partners are personally liable for the partnership debts.
GUARANTEE – A pledge by a third party to repay a loan in the event that the borrower defaults.
GUARANTOR – A person or organization that guarantees repayment of a loan if the borrower defaults or is unable to pay.
HARD ASSETS – (Also referred to as “Tangible Assets”) Those assets which are material or physical (e.g. inventory, equipment, tools, vehicles, real estate, leasehold improvements).
INDEMNITY – Payment that compensates for an incurred loss or damage.
INCORPORATE – Inclusion in, or adoption of, some term or condition as part of the contract. It differs from its company law definition where it refers to the legal act of creating a company.
INSOLVENCY – the inability to pay debts when they become due. Insolvency will apply even if total assets exceed total liabilities, if those assets cannot be readily converted into cash to meet debts as they mature. Even then, insolvency may not necessarily mean business failure. Bankruptcy may be avoided through debt rescheduling or turnaround management.
INSTRUMENT – A written legal document, created to affect the rights of the parties.
INTANGIBLE ASSET – That which has no physical existence but represents value, such as goodwill, going concern value, business trade name. (See Blue-Sky)
IRREVOCABLE – Incapable of being recalled or canceled; unchangeable.
JOINT AND SEVERAL LIABILITY – Where parties act together in a contract as partners they have joint and several liability. In addition to all the partners being responsible together, each partner is also liable individually for the entire contract – so a creditor could recover a whole debt from any one of them individually, leaving that person to recover their shares from the rest of the partners.
JOINT VENTURE – An agreement between two or more independent businesses in a business enterprise, in which they will share the costs, management, profits or benefits arising from the venture. The exact shares and responsibilities will be set out in a Joint Venture Agreement.
JURISDICTION – A jurisdiction clause sets out the country or state whose laws will govern the contract and where any legal action must take place. Don’t forget that England and Scotland have different legal codes, and this may need to be specified.
LETTER OF INTENT (LOI) – A description of the key points in a potential sale/ acquisition of a business. It is drafted to see if the parties are in general agreement on key issues before proceeding further in negotiations, and is generally designed not to be legally binding on either party. Sometimes buyers or sellers will use a more informal Memorandum of Understanding to identify the key points of a potential business purchase. Key points that buyers and sellers want to come to a general agreement on often include: stock or asset purchase, purchase price, down payment, seller financing terms, liabilities assumed, covenant-not-to-compete terms, consulting/employment agreement terms and real estate lease terms.
LIEN – A claim or charge upon real or personal property for the satisfaction of some debt or duty which can arise either by agreement or by operation of law.
LIMITED PARTNERSHIP – A partnership composed of some partners whose contributions and liabilities are limited. A limited partnership requires at least one general partner and one limited partner. The general partner(s) are responsible for the management and liability for its debts. A limited partner has no right in management and his/her liability is limited to amount of investment.
MEDIATION – A form of alternative dispute resolution (ADR), a way of resolving disputes between two or more parties with concrete effects. Typically, a third party, the mediator, assists the parties to negotiate a settlement.
MERGER – Any combination that forms one company from two or more previously existing companies.
NONDISCLOSURE AGREEMENT – A legally enforceable agreement preventing one party from using or disclosing commercially sensitive information belonging to the disclosing party to a third party.
OFFICERS – Most states require a corporation to have officers in the corporation, including President, Secretary and Treasurer. Different from Directors.
OFFSET (SET-OFF) – A deduction by one against a claim of another; e.g. unknown claims against the assets purchased by a buyer may be “offset” against the obligation the buyer owes to the seller (seller financing).
OPERATING AGREEMENT – An agreement among limited liability company (“LLC”) members governing the LLC’s business, and Member’s financial and managerial rights and duties. This includes capital accounts, membership interest, distributions of profit and allocated tax responsibility, etc.
OPTION – A written agreement granting to a party the exclusive right, during a stated period of time, to buy or obtain control of property or assets on specified terms, but without any obligation of such party actually to exercise such option.
PARTNERSHIP – A business relationship between two or more persons who join together to contribute to the capital and/or operations of an enterprise, and share the profits and losses (also, see Limited Partnership). Partnerships must lack two or more of the four corporate characteristics (see Corporations) to be taxed as such.
POWER OF ATTORNEY – An instrument authorizing a person to act as the agent of the person granting it. A general power of attorney authorized the agent to act generally on behalf of his/her principal; a special power of attorney limits the agent to a specific or particular act.
PRINCIPAL (AMOUNT) – A sum of money owed excluding any accrued interest.
PROMISSORY NOTE – A signed, written instrument which acknowledges a debt, with the promise to pay the debt on specified terms (i.e. payment amount, payment date(s), interest rate).
PRORATION – The division of money obligations according to some formula. In a business closing, a seller may have paid for certain benefits into the future which are assumed by the buyer. The cost of these benefits are “prorated” between the seller and the buyer as part of the closing statement (e.g. prepaid rent, prepaid advertising, security deposits).
PROXY – The written authorization allowing one person to vote stock on behalf of a shareholder. This authority is generally provided by the charter and bylaws of a corporation or by a state statute. If authority is not provided, a shareholder cannot vote by proxy. The record owner of the stock whose name is registered on the corporate books is the only individual who can delegate the right to vote.
PURCHASE AGREEMENT – The agreement setting out the terms for the purchase of a business. A purchase agreement is the “road map” followed by the buyer and the seller in a business transaction. It would include items such as a description of what is being purchased, the down payment and repayment terms, buyer and seller representations, warranties, and indemnification’s, and so on.
QUORUM – The minimum number of people needed at a meeting for it to proceed and make any decisions.
RATIFICATION – Giving authority to an act that has already been done. A company general meeting resolution can ratify an act previously done by the directors; or a principal can choose to ratify the act of an agent that was beyond the specified power of the agent.
RESTRICTIVE COVENANT – Is often included in long-term contracts and contracts of employment to stop the parties working with competitors during the period of the agreement and for some time thereafter. However, unless carefully written the courts will see them as being a restraint of trade and not enforce them.
S CORPORATION – A small business corporation which is treated differently than a C Corporation for income tax purposes. Normally, it can be used by a corporation with 75 or fewer domestic shareholders when the corporation has only one class of stock. Individuals, another S Corporation, estates, certain trusts, certain financial institutions and tax exempt organizations may own shares in an S Corporation. An S Corporation may own 100% of a C Corporation. If all the statutory requirements are met, the shareholders can elect to have most of the corporation’s income and deductions flow through to the shareholders in a manner similar to the taxation of a partnership.
SECURITY AGREEMENT – The agreement given by a debtor to a creditor giving the creditor a resource to look to in case the debtor fails to pay the principal obligation.
SEC FILINGS – An SEC filing is a financial statement or other formal document submitted to the U.S. Securities and Exchange Commission (SEC). Public companies, certain insiders, and broker-dealers are required to make regular SEC filings. Investors and financial professionals rely on these filings for information about companies they are evaluating for investment purposes. Private companies seeking to raise funds have to file certain exemptions to SEC filings.
SOLE PROPRIETORSHIP – A business owned by one person or married persons. The owner is personally liable for the debts of the business. The business is not incorporated.
STATEMENT OF INFORMATION – A public disclosure document that discloses to the public a corporation’s name, office location, officers, directors, and the agent for service of process. In the case of a limited liability company, the LLC’s name, business location, manager/managing member, and agent for service of process. It is filed annually for a corporation and biennially for a limited liability company and non-profit corporations.
STOCK SALE – The buyer purchases the stock in a corporation so the corporation is acquired in whole and the buyer obtains all assets and liabilities. Buyer gets no step up in basis in the underlying assets in the corporation (unless a not often used tax election is made).
SUBORDINATION – The act of making an encumbrance secondary or junior to another lien.
UNIFORM COMMERCIAL CODE (U.C.C.) – State laws which regulate the transfer of personal property. Article Nine of the U.C.C. deals with transactions which are intended to create a security interest in personal property.
U.C.C. SEARCH – A UCC search is a review of the appropriate county and State records in regard to any liens against personal property, tax liens and judgments.