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Liens and Encumbrances
A bank or other lender or creditor of your business may have placed a lien against property owned by the business, by you personally, or both. This means in essence that you cannot sell the encumbered property without either paying the indebtedness or otherwise negotiating a release of the encumbrance with the creditor. Banks will often take out a blanket lien on all the property of a corporation to protect their position.
If you are not sure as to whether there are encumbrances placed on your property, check with the Secretary of State's office in your state, and with the city or town in which you live and the city or town where your business is located.
While the cleanest way to get a lien removed is to pay the indebtedness, you may be able to make other arrangements. For example, some lenders will let the buyer assume the lien and the responsibility for the debt. It is not unusual for a closing to take place with the seller immediately taking the proceeds from the sale and paying off indebtedness thereby releasing encumbrances.
Your lawyer and the buyer's lawyer need to decide how to remove any existing liens to assure that the business is sold free and clear of encumbrances, or to decide on a strategy for transferring ownership with the new owner assuming the debt and the liens.
Offer To Purchase
Typically, when a buyer is ready to make an offer, he or she will present an Offer To Purchase to the seller. Such an offer will generally include a check for a small percentage of the purchase price as earnest money. This offer will describe the price and terms under which the buyer will buy the business. The earnest money will usually be held in escrow while the offer is pending and used as part of the purchase price if the offer turns into an actual sale.
An offer to purchase might contain several contingencies such as review of financials by a CPA, physical count of inventory, proof of necessary licenses, and a buyer's obtaining financing. These contingencies are basically escape mechanisms for the buyer to withdraw from the deal under prescribed circumstances.
An offer to purchase will usually contain a deadline by which the seller must respond. If the seller does not respond by the stated deadline date, the offer is automatically withdrawn. If the seller accepts the offer, he or she must stop looking for another deal while the accepted offer is pending. For this reason, a seller should impose his or her own deadlines for the buyer to act.
While an offer to purchase may not be binding because of the contingencies, it does indicate that the buyer is serious. It serves as a first tangible step toward a purchase. Despite the ease with which one can withdraw from most offers to purchase, such an offer is a great leap forward in the sale of a business. Few tire kickers or spies get to this stage in the process. At the very least, an offer to purchase accompanied by an earnest deposit says that the prospect is serious and wants the deal to go forward.
Letter Of Intent — LOI
For practical purposes, a letter of intent (LOI) is the same thing as an offer to purchase. It states that an individual or entity intends to take a certain action (purchasing a company in whole or part) under a certain set of circumstances. Letters of intent tend to be used for transactions that have a bit of complexity to them. For a simple transaction a Letter of Intent can be purchased and downloaded from the Internet.
As with an offer to purchase, once a seller signs off on a letter of intent, he or she must stop all attempts to sell the business while the letter of intent is active.
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