Business purchase agreements are complicated contracts that outline the terms under which a business, or its assets, is transferred from the seller to the buyer. For employers in Knoxville, these contracts are very important. A contract that is poorly written or that has vague provisions can result in expensive post-closing disputes and litigation, while also disrupting the business’s operations.
As an employer, it is critical that you understand important legal principles and ensure that your agreement is carefully structured to minimize risk and protect your investment. A Knoxville business litigation lawyer can explain what you need to know.
Common Post-Closing Disputes
The closing is not the end of the deal in any business acquisition. Instead, it is often just the beginning of the ongoing obligations of all parties. Some of the most common post-closing disputes involve issues such as restrictive covenants, employee transitions, indemnification claims, and misrepresentations.
State law in Tennessee generally recognizes that individuals and businesses have the right to negotiate freely and enter into legally binding agreements on their own terms. Still, the courts will closely scrutinize certain provisions, particularly any that allocate risk or restrict competition. For example, non-compete agreements in a business purchase agreement are typically more enforceable than those in employment law. However, the scope must be reasonable and protect legitimate business interests, and employers must draft these agreements accordingly.
Clearly Define the Scope of the Agreement
One of the most common post-closing disputes is ambiguous language that leads to questions over exactly what was purchased. Business purchase agreements should always clearly identify the following:
- Whether the agreement is a stock purchase or an asset purchase
- The assets, such as customer lists, goodwill, and intellectual property, were purchased
- Which liabilities are excluded or assumed
Failing to define the above elements can result in disputes over responsibility for contracts or debt, or pending litigation. A purchase agreement that is properly drafted will eliminate any uncertainty by clearly outlining every aspect of the transaction.
Include Detailed Representations and Warranties
Representations and warranties form the foundation of any business purchase agreement. These provisions tell the buyer about the condition of the business, including ownership of assets, compliance with laws, financial accuracy, and absence of undisclosed liabilities.
It is critical for employers to avoid vague or overly broad language. Instead, it is important to include specific schedules and disclosures that qualify these representations. This reduces the likelihood of a dispute over whether a breach has occurred. Sellers should also not overpromise in the agreement. Any misrepresentation, even an unintentional one, can result in post-closing litigation.
Include Specific Indemnification Clauses
Indemnification clauses assign risk to the parties after closing. The Tennessee statutes governing business entities recognize indemnification as an important mechanism to address liabilities, including judgments and legal expenses. To avoid disputes, employers should include indemnification clauses that address the following:
- The types of claims that are covered
- Any caps placed on the amount of damages that can be awarded
- The process for resolving claims, such as mediation, arbitration, or litigation
Vague language in indemnification clauses typically results in litigation. For instance, failing to define what constitutes a loss or notice on claims can cause serious conflict. A Knoxville business litigation lawyer can advise on the best dispute resolution methods for you and ensure these are included in the contract.
Use Restrictive Covenants Carefully
Restrictive covenants such as non-solicitation, non-compete, and confidentiality agreements are often important to protect the value of the newly acquired business. These covenants are only enforceable in Tennessee if they are reasonable in geographic scope, duration, and purpose. They must also protect legitimate business interests such as trade secrets or goodwill.
It is important for employers to tailor restrictions to the specific market and business, avoid limits that are overly broad, and clearly define the activities that are prohibited. It is critical to work with a lawyer when drafting restrictive covenants, as the law is always changing.
Address Employment Issues
Post-closing disputes are often related to employment matters such as retaining or terminating employees, transferring benefit plans, and unpaid wages or accrued liabilities. Employers should specify which employees will stay with the business, how benefits will be handled, and who is responsible for pre-closing obligations. Failing to address these issues can result in regulatory complications and unexpected liabilities.
Conduct Thorough Due Diligence
No contract can compensate for inadequate due diligence. Employers should conduct a thorough review of the business to be acquired, including the following:
- Financial records
- Contractual obligations
- Regulatory compliance
- Employment practices
Anything found from the analysis of the above should be included in the purchase agreement through disclosure schedules. This reduces the likelihood of unpleasant surprises after closing.
Clearly Define Post-Closing Obligations
Many disputes arise from unclear provisions regarding post-closing obligations. Employers should clearly define transition services, if the seller will assist after closing, earn-out provisions, performance metrics, access to records, and cooperation obligations. For example, earn-out disputes commonly arise when performance targets are vague. Objective, clear metrics are critical.
Avoid the Pitfalls of Templates
Although it may seem tempting to use templates, it is a mistake to rely too heavily on boilerplate language. Every business transition is unique, and generic clauses may not address the specific risks involved. The templates that are found online also often do not take state law, or current changes in it, into consideration. It is important to work with a lawyer who can customize a contract based on the parties’ bargaining positions, the transaction size and complexity, and industry-specific risks.
Our Business Litigation Lawyer in Knoxville Can Draft Your Agreement
Business purchase agreements are powerful tools, but only when they are carefully drafted. At The Ebbert Law Firm, our Knoxville business litigation lawyer can review the facts of your case, help you conduct due diligence, and draft an agreement that will help you avoid costly disputes in the future. Call us today at (865) 290-7637 or fill out our online form to schedule a consultation with our experienced attorney and to learn more about how we can protect you and your business.