Because it is a rare event when a closing takes place on the first day of the month and all items are perfectly paid to date‚ adjustments will have to be made at the closing so that any items prepaid will be credited back to the party that paid that item and any bills not paid will not be absorbed by the wrong part. Here is a non-exhaustive list of items that are typically adjusted at a business closing:
1. Rent – if the seller is current on its rent and the seller paid the month’s rent when the closing takes place‚ the seller has paid for the buyer’s rent for the remainder of the month. For example‚ if you close on the 15th of a given month and the seller paid the rent for that month‚ the seller has paid for 15 or so days of the buyer’s rent. Depending on the rent‚ this amount can be nominal or substantial.
2. Security Deposits – the security deposit the seller gave the landlord when the lease was first signed would have been returned to the seller after the lease expired (assuming there was no default). If the lease is assigned to the buyer without adjusting for the security deposit‚ the buyer will directly benefit from the deposit and will‚ assuming that there are no problems with him as a tenant‚ get that money back after the lease term is completed. An adjustment in the seller’s favor should be provided at closing so that the seller recoups the security deposit.
3. Real Estate Taxes – depending on whether or not the seller is responsible for paying real estate taxes‚ you will also need to address the need to adjust for real estate taxes in your agreement. If the seller is responsible for paying real estate taxes‚ then any taxes that were paid for a period of time after the sale would benefit the buyer and should be adjusted at the closing accordingly.
4. Water/Sewer – adjusting for water and sewer will depend on whether the seller is responsible for payment of water and sewer under the lease. For some businesses‚ the amount for water and sewer will be nominal. For other businesses‚ such as restaurants and car washes‚ this amount will be substantial.
5. Common Area Maintenance (CAM) – common in many leases‚ especially in shopping center and mall leases‚ the seller is responsible for paying the common charges associated with its tenancy. This amount is usually paid along with the rental payments and based upon the estimated costs of operating the shopping center or mall. The agreement should reflect that these charges‚ like rent‚ will be adjusted at closing.
6. Gift Certificates/Prepaid Items – from a buyer’s perspective‚ any prepaid items that would require the buyer to provide goods or services following the closing should be adjusted.
These are a few of the major items that will need to be adjusted at the closing of a business transaction. Each industry and business is different and each transaction will require different items to adjust. For more information on business transactions‚ please see the “Our Publications” window below and request a copy. If you are selling a business‚ you can order a copy of ENDWISE the guide to selling your business with peace of mind. If you are looking to purchase a business‚ you can request a copy of An Entrepreneurs Guide to Purchasing a Business or Franchise.
Category: Business Transactions
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