Business Acquisitions and Sales
Short Summary: If you are buying or selling a business, you’ll want to focus on the following factors in determining whether you should do a stock purchase (or membership interest purchase in the case of an LLC), or an asset purchase: (1) the degree of liability being assumed by the buyer, (2) whether the purchase should transfer the entirety of target’s assets or only some assets, (3) whether the purchase price will be paid up front or via a (secured or unsecured) promissory note and (4) tax implications.
Selling or buying a business is one of the most complicated transactions that you are likely to be a party to in your life as an entrepreneur. There are myriad ways to structure a purchase or sale of a business and you should not undertake it without counsel. To that end, this chapter is best spent outlining things you need to think about prior to negotiating a potential sale or purchase.
First, you want to conduct meaningful due diligence: learn about their financials (preferably audited financials), learn about their business relationships and contracts, learn about their employees, review their corporate maintenance and record keeping, identify and discuss any outstanding liabilities or debts, and make sure to get a really robust sense of revenue trajectories and the condition of any physical assets. You might also want a business appraisal if you’re unsure about the value of the business.
The key terms will likely revolve around whether the purchase price will be paid up front, whether a portion will be paid up front with the remainder subject to a promissory note, or whether the entire transaction will be paid via promissory note (this is not recommended).
From there, you’ll want to discuss whether any promissory note will be secured, and if so by what? Typically, a note would be secured by the assets of the company but you’re not limited to that option; you can have it secured by anything of value, including the personal assets of the purchaser. A personal guarantee is also appropriate if there is any doubt about the value of the assets. You’ll want to have a CPA involved from the start, as the structure of the purchase will be largely informed by tax considerations.
The biggest sticking points often don’t even reveal themselves until lawyers are involved and they start discussing liability and indemnification (who is responsible in the event of future and/or pending lawsuits or threatened lawsuits). One such lawsuit could undermine the entire value of the deal so you need counsel that will properly allocate risk of any possible legal action, known or unknown, at the time of the purchase.
Good contracts make for good business. They reduce the stress of dealing with the other party, and allow you the peace of mind to know that your investment is adequately protected. In my practice, I’ve seen dozens of business acquisitions that were negotiated and signed without counsel; not a single one of them was industry standard, adequately protective, or fair to my client. They all fell woefully short of reasonable and my clients ended up paying much more to plug up holes and resolve disputes than they would have had they hired an attorney up front.
I’ve even litigated business acquisitions gone bad, and they take months or years, cost tens of thousands in fees and costs, and at the end there is no guarantee that the defendant will have the assets that the court orders them to pay! You could buy a lemon dressed up as something else, only to be unable to recover your losses, even if a court or arbitrator issues a finding of fraud. Simply, if you are buying or selling a business, hire counsel and hire counsel early.
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