Common use of Terms of the Sale Clause in Contracts

Terms of the Sale. XXXx almost always cover the basics of identifying the parties and the business being sold, the purchase price, and the manner of payment of the price (e.g., whether the buyer is paying all cash at closing or the seller is financing part of the price by taking a promissory note from the buyer). Beyond these essential basics there are many additional important terms to be addressed, and for the reasons noted above the parties – and especially the seller – should consider negotiating them in the LOI. A few of the more important of these terms are: Form of Transaction and Tax Treatment. Buyers often prefer to buy assets instead of the seller’s ownership interest in the entity owning the business. Buying assets provides less risk to the buyer of taking on seller liabilities that the buyer does not want to assume. From an income tax perspective, depending upon the type of entity owning the business, buying assets allows the buyer to allocate the purchase price to assets that the buyer can depreciate over time, whereas buying the seller’s ownership interest may defer the tax benefit of the purchase price to the buyer until the buyer sells the business. The seller, on the other hand, often prefers to sell the ownership interest in the entity owning the business. Depending upon the type of entity, this may allow the seller to avoid two levels of tax on the sale[2] and/or allow the seller to pay tax at the much lower rate applying to long term capital gains. The tax difference to the seller of asset sale versus ownership interest sale could exceed 30%.[3] Because the seller and buyer can have such opposing interests on the form of transaction and the resulting tax treatment, this is a fundamental term that should be agreed in the LOI. The gap between the parties often can be bridged by an adjustment to the price in which the party who obtains the desired structure shares some of its tax benefit with the other party through a change in the price – an example of why it is better to not agree on the price until the other key terms are agreed to as noted above.