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 as to the number of advisors involved in a business transaction. Frequently there will be a broker, escrow agent, appraiser, lender, accountant, buyer and, if real estate is involved, then also a title company.
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, 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 a 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.
Asset v. 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. When each party has a lawyer, it is the buyer’s counsel that usually drafts the first set of formal documents, since buyer’s have more concerns and will want many representations from the seller regarding the condition of the business.
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 value. For example a large portion of the purchase price will be allocated to goodwill resulting in capital gains for the seller and 15 year "write off" for the buyer. These amounts are negotiated usually with help from the parties' accountant. 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, American 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 their 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 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 an escrow but normally for transactions $100,000 and higher an escrow will be used, and the parties will file a notice of the sale which is published (the "Bulk Sale" notice) and also arrange for governmental reports to show that there are no sales or use tax, employee taxes (e.g. withholdings), state income tax or liens affecting the business.
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