Mergers and Acquisitions

When considering the sale of an “S” corporation, both the structure of the sale (asset sale vs. stock sale) and the tax implications play a critical role in shaping the economic outcome for both the buyer and the seller.

Buyer Considerations:

Favoring an Asset Sale. Buyers often prefer asset purchases for two key reasons:

• Liability Shielding: An asset sale enables the buyer to avoid assuming unwanted or unknown liabilities that may be embedded in the corporate entity. This limits the buyer’s exposure to prior legal, tax, or contractual obligations of the seller.
• Step-Up in Basis: The buyer receives a “step-up” in the tax basis of the acquired assets to reflect the purchase price. This generally allows for enhanced depreciation and amortization deductions post-acquisition, improving the buyer’s after-tax cash flow.

Seller Considerations

Generally Favorable, but with Nuances: For sellers of an “S” corporation, an asset sale can also be advantageous in many situations:

• Pass-Through Tax Treatment: The gain on the sale of assets generally passes through to the shareholders and is taxed at the individual level. In many cases, this results in a single layer of taxation (unlike a “C” corporation), especially when the assets have appreciated during the period of S corporation status.
• However, additional tax consequences may apply depending on the history of the corporation and the composition of the assets being sold. These include:
  • Built-In Gains Tax (Corporate-Level Tax of up to 35%)

If the corporation converted from “C” to “S” status and the asset sale occurs within the recognition period (generally five years from the date of conversion), then a corporate-level tax of up to 35% may apply to the gain attributable to the built-in gain—i.e., the appreciation that occurred while the entity was still a “C” corporation.

• Investment Tax Credit (ITC) Recapture: If the business previously claimed an Investment Tax Credit on qualifying assets, a portion of that credit may need to be recaptured if the assets are sold before the expiration of their respective recovery periods. This recapture increases the seller’s federal tax liability.
• Sales Tax on Tangible Personal Property:  The transfer of tangible personal property such as furniture, fixtures, and equipment (FF&E) may be subject to sales or use tax under state law. The tax applies to the portion of the purchase price allocated to these items.
• Ordinary Income on Depreciation Recapture: To the extent that the purchase price allocated to depreciable assets (e.g., equipment, machinery) exceeds their tax basis, the difference is treated as recaptured depreciation and taxed at the seller’s ordinary income tax rate, rather than the preferential capital gains rate. This can materially increase the seller’s tax burden.

In business acquisitions, the decision to structure the transaction as a stock sale or an asset sale has significant consequences for both parties, particularly with respect to taxation, legal liability, transaction complexity, and economic outcomes. Each approach offers distinct advantages and disadvantages depending on the parties’ goals, the tax profile of the entity, and the nature of the business being sold.

Implications for the Seller in a Stock or Membership Sale

• Favorable Tax Treatment: From a seller’s perspective, stock sales are generally preferred because the gain realized on the sale of stock is typically taxed at long-term capital gains rates, which are lower than ordinary income tax rates. This is especially advantageous for individual shareholders of corporations.
• Simplified Transaction Process: A stock sale involves the transfer of ownership in the entity itself rather than its underlying assets. This avoids the need for separate conveyance documents for each asset, assignment of contracts, or re-titling of property—making the transaction more streamlined and efficient.
• Reduced Exposure Post-Sale: In a stock sale, the buyer assumes the entire legal entity along with its operations, which typically limits the seller’s ongoing liability for post-closing obligations or unknown claims, especially when accompanied by strong indemnification terms.
• Avoidance of Double Taxation (for C Corporations): Unlike an asset sale, where a C corporation is taxed at the corporate level and again when distributing proceeds to shareholders, a stock sale may avoid this double tax scenario altogether.

Implications for Seller in Asset Sale

• Potential for Higher Tax Burden: Sellers may be taxed at ordinary income tax rates on the recapture of depreciation and other gains attributable to certain asset classes (e.g., inventory, depreciable equipment). This can result in a higher overall tax bill compared to a stock sale.
• Complex Transaction Mechanics: Asset sales require the transfer of each individual asset and liability. This often necessitates re-negotiation of contracts, consents from third parties, and formal re-titling of real and personal property—adding time, cost, and complexity to the deal.
• Residual Liabilities: While many liabilities transfer with the assets, certain obligations—such as tax liabilities or employee claims—may remain with the seller unless expressly assumed by the buyer or waived through indemnification.
• Negotiated Purchase Price Premium: Due to the tax and administrative burdens associated with an asset sale, sellers often demand a higher purchase price to compensate for their increased exposure and complexity.

Implications for the Buyer in Stock Sale

• No Step-Up in Asset Basis: When buying stock, the buyer inherits the existing tax basis of the entity’s assets. This limits the buyer’s ability to increase depreciation and amortization deductions, potentially resulting in less favorable post-acquisition tax outcomes.
• Assumption of All Liabilities: The buyer acquires the entire entity—including known, unknown, and contingent liabilities. This increases the buyer’s risk profile unless mitigated through comprehensive due diligence and contractual protections (e.g., indemnities and escrows).
• Challenges with Contract Assignments: Stock purchases may not automatically transfer rights under certain contracts, licenses, or permits that contain change-of-control provisions, requiring renegotiation or third-party consent.

Asset Sale for Buyers

• Step-Up in Basis Advantage: Buyers benefit from the ability to allocate the purchase price across acquired assets, allowing a “step-up” in tax basis to fair market value. This can significantly enhance post-closing tax benefits through increased depreciation and amortization deductions.
• Selective Assumption of Assets and Liabilities: Buyers can choose which assets to acquire and which liabilities to assume, giving them greater control over their risk exposure and strategic investment.
• Willingness to Pay More: Because of the favorable tax treatment and cleaner separation from legacy liabilities, buyers may be willing to offer a higher purchase price in an asset transaction, particularly in cases involving valuable depreciable assets.

Additional Structuring Considerations

• Entity Type Matters: The tax structure of the selling entity—C corporation, S corporation, LLC, or partnership—is a critical factor in evaluating the tax consequences of a stock vs. asset sale. For example:
  • A C corporation asset sale may trigger double taxation.
  • An S corporation typically allows pass-through taxation, but gains from assets held during a prior C corporation period may still be taxed under the built-in gains tax regime.
• Section 338(h)(10) Election: In certain cases, the buyer and seller of an S corporation can make a Section 338(h)(10) election, which treats a stock sale as an asset sale for tax purposes, giving the buyer the benefit of a basis step-up while allowing the legal form of a stock purchase. This provides a hybrid solution when both parties have competing structural preferences.

A last minute conversion of a corporation from “C” status to “S” status will not shield the shareholders from double taxation typically imposed on asset sales by a “C” corporation. In the context of an asset sale, a “C” corporation is subject to corporate level income tax on the gain realized from the sale of its assets. Subsequently, when the after-tax proceeds are distributed to the shareholders, a second layer of tax is incurred at the individual shareholder level, resulting in double taxation.

While electing “S” corporation status can, in some cases, provide tax efficiencies by allowing income to pass through to shareholders without incurring a corporate-level tax, this benefit is not retroactive to prior built-in gains. Specifically, under Internal Revenue Code Section 1374, any built-in gain that existed at the time of the conversion to S status remains subject to the corporate-level tax if the asset is sold within a prescribed recognition period (typically five years from the date of the S election).

Therefore, the conversion to an “S” corporation only mitigates the double taxation on future appreciation—that is, the increase in value of the corporation’s assets after the effective date of the “S” election. Any gain accrued before the conversion remains exposed to corporate-level tax, even if the sale occurs after the election has taken effect.

A Letter of Intent (LOI) is a written document that outlines the preliminary terms and conditions of a proposed business transaction. While not typically intended to be legally binding in its entirety, an LOI serves several critical purposes:

• Outlines Preliminary Deal Terms: It typically includes key economic and structural elements such as purchase price, payment structure, closing timeline, and key deliverables.
• Establishes a Framework for Negotiation: It signals that both parties are serious and helps streamline due diligence and document drafting.

Enforceability of an LOI Under Georgia Law

In Georgia, the legal enforceability of an LOI depends heavily on how the document is written and the intent of the parties. Although LOIs are generally non-binding, some provisions within them can be enforceable—and, under certain conditions, a court may even treat the LOI as a binding agreement in whole or in part.

Provisions That Are Often Enforceable

• Confidentiality Clauses: These are almost always enforceable, especially when clearly drafted to protect sensitive business information shared during negotiations.
• Exclusivity Clauses (No-Shop Clauses): Provisions that restrict a seller from negotiating with other potential buyers for a defined period can be legally enforced.
• Other Defined Obligations: If the LOI includes language assigning specific duties (such as undertaking due diligence, providing financial records, or paying a deposit), courts may enforce those obligations.

Factors Courts in Georgia Consider

Georgia courts will evaluate the parties’ intent and the specificity of the language in the LOI. Key factors include:

• Whether the LOI contains language stating it is or is not binding;
• The level of detail in outlining material terms (price, assets to be acquired, payment structure, etc.);
• Whether performance has begun based on the terms of the LOI;
• Whether the LOI leaves key terms open for further negotiation or explicitly reserves those terms for a future definitive agreement. 

An LOI that contains all material terms and explicitly states that it is intended to be a binding agreement may be enforceable, even if labeled a "letter of intent."

Best Practices for Drafting an LOI

To avoid ambiguity and unintended consequences, consider the following:

• Use Explicit Non-Binding Language: 
  • Include clear language that states: “This Letter of Intent is not intended to create any binding legal obligations between the parties, except as expressly provided below.”
  • Specify which sections (such as confidentiality, exclusivity, governing law, or expense allocation) are binding, and which are not.
• Include a Robust Confidentiality Provision
  • Protect both parties—especially the seller—by restricting the use and disclosure of proprietary or sensitive information shared during the due diligence process.
• Consider an Exclusivity or No-Shop Clause
  • Prevent the seller from shopping the deal to other parties for a fixed period while the buyer conducts due diligence and finalizes terms. Be clear on the duration and scope.
• Include All Material Deal Terms: Even in a non-binding document, spelling out essential business terms can reduce the risk of future disputes. Include:
  • Purchase price and payment structure;
  • Transaction structure (asset sale vs. stock sale);
  • Timing and milestones;
  • Financing contingencies or regulatory approvals.
• Clearly Express the Parties’ Intent: If the LOI is intended to eventually result in a binding agreement, make that path clear. Conversely, if the parties do not wish to be bound at this stage, say so explicitly.

While a Letter of Intent is commonly treated as a non-binding roadmap for a deal, parties should not assume that its legal impact is negligible—especially under Georgia law. Courts will look beyond mere labels and evaluate whether the parties intended to be bound and whether the document sufficiently defines the obligations in question.

Absolutely not—the Buyer should never rely on the Seller to prepare the definitive acquisition documents in a business sale.

Why This Is a Bad Idea

While it may seem cooperative—or even cost-effective—to let the Seller take the first pass at drafting the agreements, doing so can expose the Buyer to significant legal and financial risks. 

• Sellers naturally want a deal that favors their own interests. If given control of the documentation, they are likely to propose oversimplified, one-sided terms that may omit critical protections for the Buyer. At its worst, this could look like a barebones bill of sale and a handshake agreement, without any real accountability for the condition of the business or the accuracy of its financial and operational representations.

What the Buyer Needs

As the party taking on the operational and legal future of the business, the Buyer needs an agreement that:

• Clearly defines the scope of what is being acquired, including assets, liabilities, and rights.
• Includes robust representations and warranties from the Seller regarding the financial condition, legal compliance, contracts, taxes, employment matters, and more.
• Outlines indemnification provisions to protect the Buyer in the event that any of the Seller’s representations turn out to be false or misleading.
• Includes covenants and closing conditions that ensure both parties meet their obligations and that the Buyer receives exactly what they’ve bargained for.
• Addresses post-closing matters, such as non-compete clauses, transition support, and dispute resolution mechanisms.   

These provisions are not optional luxuries—they are essential tools to allocate risk and ensure transparency in the transaction.

The False Economy of “Saving on Legal Fees”

Some Buyers mistakenly believe that letting the Seller prepare the documents will reduce legal costs. In practice, however, this approach usually results in:

• Higher costs down the road, when the Buyer’s attorney must overhaul or renegotiate poorly drafted or biased documents.
• Increased negotiation friction, as the Seller will have already become invested in language that strongly favors them.
• Delayed closings, due to the added time required to correct or supplement missing or deficient provisions.

It is almost always less expensive and far more efficient to start with a well-drafted agreement that reflects the Buyer’s objectives and protections from the outset.

In the context of a business acquisition, the schedules and exhibits attached to the purchase agreement are not mere add-ons—they are fundamental components of the deal and carry substantial legal and practical significance. In many cases, post-closing disputes, claims, or liabilities arise directly from the content—or omissions—within these schedules.

What Are Schedules and Exhibits?

Schedules: These are detailed disclosures provided by the Seller that correspond to the representations and warranties in the body of the purchase agreement. For example, if the agreement states that the Seller has no outstanding litigation, the corresponding schedule would list any exceptions to that statement—such as pending lawsuits or threatened claims.

Exhibits: These typically include form documents, such as the form of promissory notes, transition service agreements, employee offer letters, or corporate resolutions, and are often used to set forth deliverables or supporting documents necessary for the transaction.

Together, the schedules and exhibits provide the granular, transaction-specific detail that forms the factual and legal foundation of the broader agreement.

Why Are Schedules So Important?

• They Define the Scope and Accuracy of Representations and Warranties: Each representation or warranty made by the Seller is subject to disclosure via schedules. For example:
  • A representation that the Seller has no environmental violations may be qualified by a schedule listing prior remediation actions.
  • A representation that the Seller owns all intellectual property used in the business may be narrowed by a schedule listing third-party licenses or joint ownership agreements.
  •  Inaccuracies, omissions, or vague disclosures in these schedules can lead to claims of misrepresentation or breach of warranty—which may expose the Seller to post-closing indemnification obligations or even litigation.
• They Allocate Risk Between the Parties: The information disclosed in the schedules affects how risk is allocated between Buyer and Seller. Accurate and complete schedules can limit the Seller's liability by putting the Buyer on notice of certain facts. Conversely, failure to disclose material information can shift the liability back to the Seller—even if the Buyer had independent knowledge of the issue.
  • Importantly, under most purchase agreements, the Buyer’s knowledge of an issue does not waive the Seller’s liability unless the agreement explicitly provides otherwise. This means that Sellers cannot assume that a Buyer’s prior knowledge of a fact insulates them from liability if that fact is not properly disclosed in the schedules.
• They Provide a Basis for Post-Closing Remedies: Should a dispute arise after closing—such as unexpected litigation, unpaid taxes, or undisclosed liabilities—the first documents attorneys and advisors will scrutinize are the schedules. These schedules often determine whether the Buyer has a legitimate claim for breach and whether the Seller is responsible for damages.

Best Practices for Sellers and Buyers

For Sellers: 

• Review each representation and warranty in detail and ensure that every exception or nuance is disclosed clearly and completely in the corresponding schedule.
• Avoid vague references such as “may include” or “not limited to”—precision matters.
• Understand that failure to list an exception may constitute a breach of the agreement, regardless of whether the Buyer was aware of the issue beforehand.

For Buyers:

• Conduct thorough due diligence to verify the information disclosed in the schedules.
• Cross-check schedules with the Seller’s data rooms, financials, and legal documents.
• Request supplemental disclosures or clarification if information appears incomplete or inconsistent.

When structuring a covenant not to compete in connection with the sale of a business in Georgia, it is critical to ensure that the restrictions imposed on the seller are reasonable, narrowly tailored, and in alignment with legitimate business interests. Under Georgia law—specifically the Restrictive Covenants Act (RCA)—non-compete agreements entered into as part of the sale of a business are treated more favorably than those in employment contexts but must still meet certain enforceability criteria.

Key Legal Elements of an Enforceable Non-Compete (Georgia Business Sale)

• Protection of a Legitimate Business Interest: The covenant must be designed to protect a legitimate interest of the buyer. This may include:
  • Established customer relationships
  • Confidential business information
  • Trade secrets
  • Goodwill of the business being sold

Georgia courts uphold non-competes when they are crafted to reasonably protect these business assets, especially in the context of preserving the value of the purchased enterprise.

• Reasonable Duration: Presumption of Reasonableness: Under Georgia law, a duration of two years or less is generally presumed to be reasonable in the sale-of-business context. Longer periods may still be enforceable but are more likely to face judicial scrutiny. The reasonableness depends on the type of business and the nature of the interest being protected.
• Reasonable Geographic Scope: The geographic limitation must be narrowly tailored to the area where the business operates and where its customer base resides. For example, a restriction covering a specific city, county, or radius (e.g., 25 miles) may be upheld, while a blanket restriction covering the entire state of Georgia or multiple states is likely to be considered overbroad unless the business actually operates in those regions.
• Reasonable Scope of Restricted Activities: The covenant should specifically identify the prohibited activities, such as:
  • Owning, managing, or working for a competing business;
  • Soliciting the business’s former clients;
  • Using proprietary information or trade secrets.   

Broad restrictions (e.g., “engaging in any similar business”) may be deemed unenforceable for lack of specificity.

• Adequate Consideration: In the context of a business sale, consideration is typically embedded in the purchase price. Courts recognize the value the seller receives from the transaction as sufficient to support the non-compete. Nonetheless, the agreement should clearly recite that consideration was given in exchange for the non-compete.
• Clarity and Specificity:  The language of the covenant must be clear, precise, and unambiguous. Ambiguities can lead to disputes and potential invalidation. Terms like “competitive business” or “confidential information” should be defined where possible.
• Compliance with Georgia’s Restrictive Covenants Act (RCA): The RCA (O.C.G.A. § 13-8-50 et seq.) governs non-competes in Georgia and is more lenient in the sale-of-business context than in employer-employee relationships. Courts are allowed to “blue pencil” (modify or sever) overbroad provisions to render them reasonable and enforceable, provided a severability clause is included.

Examples of Reasonable and Unreasonable Restraints

Reasonable Restraints

• Time: A two-year restriction following the closing date.
• Geography: A 25-mile radius from the location of the sold business.
• Scope: Prohibition on soliciting existing customers or using proprietary software or trade secrets of the sold company.

Unreasonable Restraints

• Excessive Duration: A non-compete extending beyond 5 years without justification.
• Overbroad Geography: Restricting the seller from competing anywhere in the state or the southeastern U.S. without evidence of business operations in those areas.
• Vague Activities: Prohibiting the seller from engaging in “any business similar in any way” without defining what “similar” entails.

Additional Clauses to Include

• Severability Clause: A well-drafted agreement should include a provision stating that if any provision is found unenforceable, it may be modified or severed by a court while preserving the rest of the agreement. This helps prevent the entire covenant from being invalidated due to one overly broad term.
• Non-Solicitation and Non-Disclosure: A non-solicitation clause restricts the seller from soliciting the business’s clients, customers, or employees. A non-disclosure clause protects the buyer from the misuse of confidential or proprietary information post-sale.

Both provisions are commonly included alongside non-compete clauses to strengthen protection.

Tax Implications

• For the Seller: Payment allocated to the non-compete may be taxed as ordinary income, not capital gains.
• For the Buyer: The buyer may amortize the cost of the non-compete over a 15-year period for tax purposes under IRS Section 197.

The timing and scope of due diligence in a business acquisition are critical strategic considerations, especially for the Seller. While Buyers understandably want as much information as possible as early as possible, the Seller must balance transparency with protection—ensuring that confidential business information is not prematurely disclosed and that disruption to the business is minimized.

Typical Timing: After the Letter of Intent (LOI)

In most transactions, due diligence begins after the parties sign a Letter of Intent (LOI). At this stage, the Buyer has expressed serious interest and the key commercial terms (e.g., price, structure, timing) have been broadly agreed upon. Allowing diligence at this point offers the following benefits:

•  It ensures that only qualified and committed Buyers gain access to sensitive business information.
• It provides the Buyer a window to verify representations before committing to a binding agreement.
• It enables both parties to develop acquisition documents in parallel with the diligence process, saving time.

Key Considerations When Structuring Due Diligence Timing

• Scope and Depth of Inquiry: The Seller should clearly define the categories of diligence materials that will be provided early, versus those that will only be shared later in the process or at signing/closing. Common categories include:
  • Financials and tax returns
  • Customer and supplier contracts
  • Employment and HR records
  • Intellectual property
  • Compliance and litigation history
• Protection of Confidential Information: Until there is a high degree of confidence that the transaction will close (e.g., when parties are finalizing a definitive agreement), Sellers should avoid sharing highly sensitive or proprietary information. This is especially important if the Buyer is a competitor or a strategic acquirer, as misused information could damage the Seller’s competitive position. Always require the Buyer to execute a strong confidentiality or non-disclosure agreement (NDA) before any materials are shared.
• Minimizing Operational Disruption: Due diligence can consume significant internal resources, distract employees, and strain operations. Sellers should schedule diligence to:
  • Minimize interference with day-to-day business;
  • Assign a point person or team to manage document requests and coordinate responses;
  • Stage the release of documents to avoid overwhelming internal staff or creating unnecessary alarm among employees or stakeholders.
• Cost and Efficiency: Both parties incur costs in the diligence process, including legal and accounting fees, data room costs, and internal personnel time. Ensuring that diligence is efficient and focused on material matters can save both sides time and money.

Best Practices for Sellers

• Staggered Disclosure: Consider releasing diligence information in phases, with general business data shared early and highly sensitive items (e.g., customer pricing, trade secrets) reserved for post-signing or after the buyer has made a non-refundable deposit or satisfied certain contingencies.
• Use of Data Rooms: Host materials in a secure online data room to monitor access, manage document versions, and revoke access if needed.
• Gatekeeping: Designate a trusted advisor or legal counsel to review diligence requests and filter inappropriate or overly broad inquiries.
• Ensure a Clear LOI: The LOI should outline key diligence terms, including:
  • The anticipated start and end date for due diligence;
  • Categories of documents to be provided;
  • Buyer’s obligations during diligence, including confidentiality and limited use of materials.

In the context of a business acquisition in Georgia, whether a Buyer should be permitted to contact the Seller’s customers, suppliers, or employees prior to closing is a sensitive issue with significant legal, business, and strategic implications. While Buyers naturally seek insight into the stability and quality of key relationships, Sellers must balance transparency with confidentiality and operational continuity.

General Guiding Principle: Proceed with Caution

As a rule, the Seller should not permit the Buyer to contact customers, vendors, or employees until the transaction is well-advanced, and preferably not before signing a definitive purchase agreement or satisfying key conditions (e.g., financing contingencies). In some cases, limited access may be granted with tight controls and mutual agreement between the parties.

Key Considerations Under Georgia Law and Practice

• Protection of Confidential Business Relationships:  Georgia recognizes the protection of customer goodwill and business relationships as a legitimate interest in the context of restrictive covenants and business sales. Premature contact may jeopardize these relationships, particularly if customers or suppliers fear a change in business terms or service quality. Sellers often include non-solicitation and non-disclosure provisions in the Letter of Intent (LOI) and due diligence protocols to prevent unauthorized outreach.
• Risk of Disruption or Alarm: Contacting employees or customers too early can create uncertainty, operational disruption, or even attrition, especially if the deal does not close. Key employees may become unsettled, competitors may exploit perceived instability, and suppliers may seek alternative relationships if they sense risk.
• Due Diligence Needs vs. Business Stability: Buyers often request access to:
  • Key employees, to assess retention risks, talent gaps, or alignment with future management roles.
  • Major customers or vendors, to confirm contractual terms, satisfaction levels, or continuity post-closing.

However, this access should be carefully staged and conditioned, typically

• Post-signing, under a definitive agreement with clear limitations;
• With Seller participation or consent;
• After establishing a non-disclosure agreement and, where appropriate, a non-solicitation clause.
•  Deal Progression and Leverage: Allowing early access to critical stakeholders gives the Buyer leverage and can expose the Seller to reputational or competitive risks if the deal falls apart. Sellers are better protected by allowing such contact only after contingencies have cleared, or at closing, when the risk of a failed transaction is minimal.

Best Practices for Managing Third-Party Contact

• Document Protocols in the LOI or NDA: Include specific provisions prohibiting contact with third parties without the Seller’s written consent.
• Delay Customer/Supplier Contact: Postpone direct customer or supplier communication until post-signing or near closing. Where necessary, the Seller may accompany or participate in such communications.
• Control Employee Access: Limit pre-closing employee interviews to key personnel only, such as senior executives or essential managers, and only with advance notice and consent. Consider using management presentations as an alternative.
• Condition Access on Deal Milestones: Consider requiring a signed definitive agreement, the expiration of due diligence periods, or evidence of secured financing before allowing sensitive outreach.
• Use of a “No-Talk” Clause: Include a clause in the LOI or confidentiality agreement barring the Buyer from contacting customers, suppliers, or employees without express permission.

Georgia-Specific Enforcement Considerations

While this issue is not directly tied to Georgia’s restrictive covenant laws (e.g., the Restrictive Covenants Act), the Seller's concern about preserving goodwill and trade relationships is strongly supported under Georgia case law, particularly when:

• The transaction includes a non-solicitation covenant; or
• The Buyer could use pre-closing contact as a means to poach clients or employees if the deal falls through.

A well-drafted purchase agreement should reinforce these protections with post-termination covenants, including non-solicitation of customers and employees, and potentially non-compete restrictions where appropriate and enforceable under Georgia law.

In business sales, brand identity—including the company’s name and its product names—can be a significant portion of the deal’s value. Buyers often assume they will be acquiring the full and unrestricted right to use those names after closing. However, Sellers should exercise caution when asked to provide an absolute guarantee or "bond warranty" that the Buyer will have an uninterrupted and exclusive right to use those names going forward.

Why an Absolute Guarantee Is Risky for the Seller

Although it may seem straightforward, providing an absolute warranty that the Buyer can use the company or product names post-closing exposes the Seller to significant legal risk. This is due to several key factors:

• Lack of Formal Trademark Protection:  Many businesses operate under unregistered names, relying on common law rights based on local or regional use. If the Seller’s company or product names are not federally registered, it becomes difficult to confirm the scope and exclusivity of rights—particularly in national or multi-state markets.
•  Limitations of Trademark Registration: Even if names are registered with the U.S. Patent and Trademark Office (USPTO) or relevant state agencies, registration does not guarantee that no third party has superior rights based on earlier use in commerce. Trademark rights in the U.S. are rooted in first use, not registration, meaning a third party who began using a similar name earlier may have a right to challenge the Buyer’s use, even post-sale.
• Unknown Conflicts and Prior Use by Others: Sellers may be unaware of conflicting uses by third parties in other jurisdictions or markets, especially if they have not conducted a comprehensive trademark clearance search. Potential claims from former business partners, licensees, or competitors could arise, alleging prior rights or market confusion.
• Post-Sale Expansion and Use: Even if the Seller has valid rights in a local or limited market, the Buyer may plan to expand the use of the brand name into new geographic areas or product lines, potentially triggering infringement claims from third parties with rights in those adjacent spaces.

Recommended Approach for Sellers

Rather than providing an absolute warranty, the Seller should offer a qualified representation and warranty regarding intellectual property, crafted to reflect the facts and legal protections actually in place.

Best Practices Include:

• Limit the Warranty to Known Rights: State that the Seller has not received notice of any claims or disputes regarding the company or product names and is not aware of any third-party rights that would materially interfere with the Buyer’s intended use.
• Scope the Warranty to Seller’s Use: Represent that the Seller has used the name in commerce without interference and that, to the Seller’s knowledge, such use does not infringe any third-party rights.
• Provide Documentation: Include in the disclosure schedules:
  • A list of any registered trademarks, service marks, or pending applications;
  • Copies of any third-party licenses or assignments related to the names;
  • Any known challenges or cease-and-desist notices involving the use of the names.  
• Encourage Buyer Due Diligence: The Buyer should be advised to conduct a trademark clearance search and legal review of the company and product names as part of its due diligence. Responsibility for any post-closing brand-related litigation should be clearly addressed in the indemnification provisions of the purchase agreement.
• Indemnity Structuring: If the Buyer insists on strong protections, consider limiting liability through:
  • Caps or baskets on indemnification;
  • A survival period for IP-related claims;
  • Exclusions for third-party actions arising from expansion or rebranding post-closing.

The Seller should not guarantee the Buyer’s absolute right to use the company or product names unless a thorough trademark review has been conducted and the legal rights are indisputably clear. Even then, warranties should be carefully qualified, with representations tailored to the Seller’s actual knowledge and documented use. An absolute warranty may result in unintended liability if the Buyer encounters trademark challenges after closing.

When a franchisee sells their business as part of a merger or acquisition, a franchise contingency clause is essential to ensure compliance with the existing franchise agreement and to protect both the franchisor's brand and the integrity of the franchise system. Because most franchise agreements include detailed terms governing transferability, the merger agreement must include specific provisions to address these obligations and potential outcomes.

Structure of a Franchise Contingency Clause

• Franchise Agreement Review: Reference to Franchise Agreement Terms
  • The clause should begin by expressly referencing the relevant provisions of the existing franchise agreement that govern transfers, assignments, or changes of ownership.
  • Common clauses include: approval conditions, successor obligations, and rights of first refusal.
• Franchisor Approval: Most franchise agreements require the franchisor’s prior written consent to any transfer or sale. The clause should affirm that the transaction is contingent upon obtaining such approval, and it should set a deadline for submission and response.
• Notice Requirements: The merger agreement should specify:
  • Timing of notice to the franchisor (e.g., “at least 30 days prior to closing”);
  • Method of notice (e.g., registered mail or electronic delivery with confirmation);
  • The information required in the notice.
• Transfer Fee: The agreement must address any transfer fees imposed by the franchisor, including:
  • The amount or formula;
  • Who bears responsibility for payment (usually the buyer);
  • When it must be paid (e.g., prior to or at closing).   

Buyer Qualification and Due Diligence

• Buyer Eligibility Standards: The buyer must meet the franchisor’s eligibility criteria, such as:
  • Minimum net worth and liquidity;
  • Business experience in the relevant industry;
  • Willingness to comply with system standards.
• Franchisor Due Diligence: The clause should allow the franchisor to conduct reasonable due diligence on the prospective buyer, including:
  • Background checks;
  • Financial analysis;
  • Review of proposed ownership structures.
• Required Documentation: To expedite approval, the merger agreement should list the documents the buyer must submit, such as:
  • Personal financial statements;
  • Business plans;
  • References and resumes;
  • Signed acknowledgment of franchise agreement terms.

Transition and Training

• New Franchisee Training: The clause should outline the training requirements for the incoming franchisee, including:
  • Timeframes and location;
  • Costs and who bears them;
  • Consequences of failure to complete training.
• Transfer of Assets and Liabilities: The contingency should provide clarity on the scope of assets being transferred, including:
  • Inventory, equipment, signage;
  • Customer databases and goodwill;
  • Assignment of vendor relationships
• Transition Support: Include language on any support the franchisor will provide to the buyer post-closing (e.g., field support visits, brand orientation).

Termination Contingency and Conditions

• Franchisor Disapproval:  The agreement should state that if the franchisor denies consent, the entire merger or asset transfer may be:
  • Terminated without liability to either party; or
  • Subject to renegotiation.
• Franchisee Default: Include a statement that if the franchisee is in breach or default of their obligations at the time of proposed transfer, the franchisor may:
  • Withhold consent;
  • Terminate the franchise agreement;
  • Impose cure periods or corrective actions. 

Non-Compete and Restrictive Covenants

• Enforceability of Existing Covenants  The clause should confirm the continued enforceability of any non-compete provisions against the selling franchisee, whether under the original franchise agreement or a separate sale agreement.
• Scope and Duration Define:
  • Geographic limitations (e.g., within 10 miles of franchise territory);
  • Duration (e.g., 2 years post-sale);
  • Prohibited activities (e.g., operating or assisting a competing business).  

Additional Legal and Operational Considerations

• Environmental and Regulatory Compliance: Ensure that the franchise location is in compliance with environmental laws, health codes, and safety regulations, and that no pending violations exist at the time of transfer.
• Insurance Requirements: The buyer must obtain or maintain insurance policies as required by the franchise agreement (e.g., general liability, workers' compensation), and name the franchisor as additional insured if required.
• Intellectual Property Protections Reaffirm that:
  • The trademarks, trade dress, trade secrets, and branding materials remain the exclusive property of the franchisor;
  • Any misuse or unauthorized modification by the buyer may result in termination.  

Why This Clause Is Essential

• Protects Legal and Brand Integrity: The franchisor maintains control over who operates under their brand, while the franchisee avoids breaching transfer provisions that could expose them to liability.
• Supports a Smooth Transfer of Ownership: Ensures that the buyer is vetted, trained, and ready to operate the business in compliance with system standards.
• Prevents Delays and Disputes: Pre-negotiated terms related to approvals, documentation, and consequences help prevent misunderstandings and last-minute roadblocks.  

A financing contingency clause is a common and essential provision in many merger and acquisition agreements, particularly when the buyer does not have the full purchase price in liquid assets and must secure debt, equity, or hybrid financing to complete the deal. This clause is designed to balance the needs of the buyer (to secure adequate funds) and the seller (to ensure deal certainty).

Purpose of a Financing Contingency  

The main objective of a financing contingency is to:

• Protect the buyer from liability or breach if financing efforts are unsuccessful;
• Allow the buyer to terminate or renegotiate the transaction if the required financing cannot be obtained within a defined period;
• Encourage realistic planning and transparency around funding sources and timing. 

Without this clause, a buyer could be in default under the agreement if they are unable to close for lack of financing—even if they exercised good-faith efforts.

Key Components of a Financing Contingency Clause

• Type of Financing Specify the form(s) of financing the buyer intends to pursue, including:
  • Bank loans or commercial lending
  • Equity financing or private placement
  • Bridge loans or mezzanine debt
  • SBA or government-backed programs (if applicable)  

Example: “Buyer shall have the right to terminate this Agreement if it is unable to obtain a secured term loan from a commercial bank or other institutional lender in the principal amount of $1,000,000…”

• Amount of Financing Clearly define the total dollar amount the buyer must secure in order to fulfill its obligations under the agreement. If multiple tranches or sources are involved, the clause should explain how much must be committed from each source.

Example: “Buyer must secure no less than $5,000,000 in combined debt and equity financing to proceed to closing.”

• Conditions for Approval Outline basic expectations regarding:
  • Maximum acceptable interest rates
  • Repayment terms
  • Loan covenants
  • Material adverse change (MAC) provisions in financing agreements

This protects the buyer from being forced to accept unreasonable or commercially infeasible terms.

• Deadline for Securing Financing: Establish a fixed date or time window (typically 30 to 60 days from signing) by which the buyer must:
  • Obtain a written financing commitment; or
  • Notify the seller if the contingency will not be satisfied

Example: “Buyer shall have until the date that is 45 days from the Effective Date (the ‘Financing Deadline’) to obtain financing commitments satisfactory to Buyer.”

• Buyer’s Obligations and Good Faith Efforts The clause may impose a “commercially reasonable efforts” or “good faith” obligation on the buyer to actively pursue financing and keep the seller informed of progress. Sellers often seek documentation that shows meaningful effort (e.g., loan applications submitted, investor pitches made).

Negotiation Dynamics

Buyer Perspective:

• May request a longer contingency period if pursuing complex financing (e.g., equity rounds, syndications);
• May seek broad termination rights based on subjective satisfaction of terms (“subject to Buyer’s sole discretion”);
• Desires protection from litigation or deposit forfeiture if financing fails.

Seller Perspective May require:

• Evidence of financing pre-LOI or pre-signing;
• A shorter contingency period to avoid deal uncertainty;
• Automatic waiver or termination rights if the buyer does not secure financing by the deadline;
• “Hell or high water” clauses in highly competitive deals, obligating buyers to close regardless of financing status.

Alternatives and Enhancements

• Reverse Termination Fee: Buyer pays a fee if it cannot close due to financing failure, as a compromise between risk-sharing and deal certainty.
• Equity Commitment Letter: Used in private equity-backed deals to demonstrate available capital from sponsor firms.
• Deposit Forfeiture: Earnest money or escrow deposit may be retained by the seller if the buyer walks for financing reasons after a certain milestone.

A financing contingency clause is a critical tool in M&A transactions where the buyer’s ability to close depends on securing outside capital. The clause should be precisely drafted, balancing flexibility for the buyer with predictability for the seller. Key elements such as type, amount, timing, and approval conditions must be clearly defined to avoid post-signing disputes or unnecessary termination risks.