What’s Wrong With This Transaction?

Bob Buyer and Stu Seller agree that Bob will buy Stu’s business.  Stu is 100% owner of the corporation.  They agree on an asset only purchase, for a purchase price of $425,000.  They each sign a two page document showing a purchase price of $250,000, and Bob provides Stu with $100,000 in cash and a personal check for $40,000, payable to Stu.

There are several problems with this scenario.  First, it is difficult to prepare an adequate asset purchase agreement in two pages, and certainly the purchase price in the document should match the agreed upon purchase price.  It is doubtful this document was prepared, or even reviewed, by an attorney.  No mention is made of a bill of sale, assignment of lease or any other mechanism to transfer the business from Stu to Bob.  

In addition, Bob should not personally purchase the assets, but should create a corporate entity to purchase and own the assets.

Next, paying cash provides no paper trail, which would be necessary in the event something goes wrong.  Further, Stu is not the owner of the assets, his company is, thus has no legal right to transfer them.  Any check should be payable to the company and all funds deposited in the company’s account. 

Finally, it is unclear what the purchase price is or how it will be paid.  $140,000 is neither the agreed upon price or the price reflected in the document.  How much does Bob owe, and what are the terms regarding its payment? No mention is made of a promissory note or other document describing any balance owed by Bob or the payment terms.

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