Legal Documents Involved in Selling a Fitness Club or Business
The goal of any successful transaction should be to benefit both parties. The following legal documents make sure that all of the terms and disclosed and agreed to so that there is no misunderstanding later on.
The goals of these legal documents are to :
- Create a safe and secure environment in which both parties feel comfortable sharing information and conducting due diligence
- Define the terms of the transaction including what is being sold or purchased, the purchase price, terms, and the buyer and seller’s obligations
- Protect both parties against misrepresentations and fraudulent actions
- Provide a process of legal remedy should that the buyer and seller’s agreements be violated.
Below are just a few of the most common documents you can expect to run across in buying or selling your leisure or fitness related business or health, fitness or sports club.
Letter of Intent
A letter of intent provides the general framework of a final transaction. Although it is not a binding contract like the final purchase agreement, it certain sections of the letter of intent like confidentiality, remedies, and non-compete provisions are often binding.
The letter of intent provides a high level outline of the terms that the buyer is proposing, including the total purchase price, what is being purchased, the amount of seller financing requested and the terms, the expected closing date, a period of exclusivity to allow the buyer to do due diligence, and any other elements or terms that are important to the buyer.
Sellers usually respond to the letter of intent with a counter offer. Once everything is accurately documented and agreed to in the letter of intent, the final purchase agreement should mirror the terms in that letter of intent. If during due diligence the buyer discovers some facts that were not disclosed or that we misrepresented, i.e., the financials are different that presented or material facts were not disclosed prior to signing of the letter of intent, the final purchase agreement may account for these differences (assuming the buyer does not walk away from the deal).
The key to ensuring that a letter of intent leads to a final purchase agreement is make sure all material facts are presented and that they are accurate and verifiable.
The purchase agreement is the governing document in the transaction. It is often 30+ pages long and includes all of the terms and provisions of the deal and is the binding agreement that governs the transaction. All other closing agreements (non-compete agreements, employment or consulting agreements, asset allocation agreements, promissory notes) are tied to this agreement.
Drafting the purchase agreement is typically held to the end of due diligence because of its importance. Because it is time consuming and expensive to draft this document, buyers will only instruct their attorneys to prepare the purchase agreement once they have completed their due diligence and are comfortable with everything about a company.
In some highly competitive transactions, a buyer may be willing to provide a conditional asset purchase agreement instead of a letter of intent. The goal here is to demonstrate the buyer’s eagerness and commitment to getting a deal done, but this is pretty rare.
Buyer Promissory Note
If a transaction involves seller financing, and the financing is in the form of a seller loan, one of the key transaction documents will be a buyer’s promissory note. The promissory note is an agreement that spells out the amount of seller financing provided to the buyer, the payment schedule, interest rate, and default remedies related to the seller financing.
A promissory note is typically tied to a purchase agreement so that both parties (and the courts if necessary) understand the context under which the note was issued.
The asset allocation is an agreement between the seller and buyer about how the purchase price should be applied to the different assets the buyer acquired. The asset allocation agreement itself is not a complex document, but its implications can be significant from a tax standpoint to both the buyer and seller. Sports Club Advisors recommends that buyer and seller consult a tax attorney or tax advisor regarding the implications of the asset allocation for their deal before an offer is accepted and then again before signing the Asset Allocation Agreement.
Most purchase agreements include a non-compete clause within that document itself. However, many attorneys like to have the non-compete agreement as a separate document. Doing this allows the terms of the non-compete agreement to be more fully defined and to have different remedies from the Purchase Agreement. Sellers should always expect to sign a non-compete agreement when they are selling fitness center, sports club, or fitness related business. Buyers need to be assured that they will have an adequate time to recoup their investment and will not be immediately competing with the seller.
Bill of Sale
The bill of sale is a receipt that acknowledges the buyers receipt of assets and the seller acknowledging the receipt of purchase price as spelled out in the purchase agreement. It exists to protect against any claims of a lack of delivery. As a result, it should only be signed when the purchase price and assets being sold have been received by each party.
While these documents appear in every transaction, each club or business is unique, and every buyer and seller have unique needs, so it is not uncommon for transactions to require additional documents, like leases, assignments of contracts, consulting agreements, indemnification agreements, or lien waivers.
When selling your health club or fitness related business, you should hire the most qualified M&A attorney you can find to represent you. These legal documents are intended to protect you, and while attorneys fees represent an additional cost, the cost is minimal compared to the expense of a lawsuit.