Business Transactions

The purchase or sale of a business usually involves such a large amount of money relative to the parties' net worth that it is a time to be especially careful in choosing the structure and processing of the transaction.

Advisors. It is always surprising at the large number of advisors involved in a business transaction. Frequently there will be a broker, escrow agent, appraiser, lender, attorney, accountant, buyer and, if real estate is involved, a title company as well.

Pre-Sale Process. Sellers need to understand each step in the selling process. Ideally a seller will start working on the sale long before the business is offered. The financial statements should be cleaned up, intangible assets like trademarks protected, personal expenses reduced, and key employees retained on a long-term basis, etc.

Selling Process. Most brokers will not place your business on a multiple listing service, but will use different and more private channels to contact qualified buyers. The broker will want the seller to sign a listing agreement which will include a guarantee by seller that information given the broker (who passes it on to the prospective buyer) is true and accurate.

Purchase Documents. The purchase documents usually consist of the broker's listing agreement, the confidentiality agreement with the buyer, an initial offer plus counter offers, escrow instructions and the final, more complete documents including promissory note, security agreement, bill of sale, list of assets, intangibles, covenant not to compete, employment agreement for seller and so forth. Often, at the beginning of the process the parties will forego an offer document and prepare a letter of intent (LOI). The key for using an LOI is to obtain agreement on those important terms of the sale but not to get too detailed, otherwise the sale process will become delayed and negate the purpose of the LOI, which is to state the basic terms and facilitate moving on to the next step, due diligence and formal documents.

When each party has a lawyer, it is the buyer's attorney who usually drafts the first set of formal documents, since buyers have more concerns and will want many representations from the seller regarding the condition of the business.

Asset vs. Stock. This is one of the early decisions to be made since it will set the stage for other aspects of the transaction, especially the tax and liability consequences. This should be agreed upon before the documents are drafted.

Tax Allocations. In an asset sale of a business there is a specific method for determining the tax consequences of the parties. The purchase price is allocated to certain categories of assets, both tangible and intangible. Each category may have different tax consequences and the amount allocated does not have to exactly match the fair market values. For example, a large portion of the purchase price may be allocated to goodwill resulting in capital gains for the seller and a 15-year write-off for the buyer. These amounts are negotiated usually with help from the parties' accountants. Suffice it to say, get good tax advice.

Due Diligence. This is the process that a buyer goes through to determine the nature, characteristics and condition of the business. This is started by the seller providing current and past financial statements, tax returns, contracts, equipment and real estate leases, employment agreements, history of repairs, land reports regarding hazardous waste, Americans with Disability Act compliance, and so forth. It is very important to set deadlines to make the information available and for the buyer to timely complete his or her review.

Representatives and Warranties. There are many issues that can't be determined by looking at a piece of paper, record or contract. In these cases the buyer will require the seller to make statements regarding the condition or presence of something. Examples are (i) whether there are any threatened or pending lawsuits, claims or governmental actions against the seller, and (ii) whether the financial statements are true and accurate.

Escrow, Bill of Sale and Clearances. Parties vary on whether they want to use an escrow. The escrow agent will usually file a notice of the sale with the state which is published (the Bulk Sale notice) and also arrange for governmental reports to show that there are no sales or use taxes, employee taxes (e.g., withholdings), state income tax or liens affecting the business.

Also, read our articles providing legal and practical information pertaining to franchise and business sales issues.