When deciding to buy a small business, you should err on the side of caution and retain the services of an attorney in order to make sure that you understand all the legal facets of buying a small business. The process of buying a business can happen in different ways and will usually be handled by one of a few common methods.
What are you buying?
In the case of an asset purchase, the buyer will purchase some or all of the assets of a company. Buyers tend to like this arrangement because it is the transfer of a business’ assets (equipment and inventory) that does not pass along the debts and liabilities of the seller.
In a stock purchase, the buyer will effectively step into the shoes of the current owner. Sellers tend to prefer this type of transaction because in it, the buyer takes on the liabilities and debts that of the seller.
A merger is the middle-ground between an asset purchase and a stock purchase for companies that are buying another business to incorporate into their existing company. This form of purchase is liked by both buyers and sellers, as it will usually entail a swap of stock in the new company for the stock of the old (merged) corporation. The swap of stocks in this case is tax-free.
Regardless of what form you wish the transaction to take, it is advisable to consult a lawyer as early in the process as possible. A lawyer will help ensure that the transaction forms up to be the kind that will be best for you. Also, a lawyer will help to guide you through the four general phases of a business purchase.
Pre-Negotiation
Before you actually begin negotiations with the other party, it is important to establish some things. During this phase, it is important to establish both the maximum price that you are willing to pay, and the lowest price that the seller will accept. In addition to knowing the range that a price must fall within, it is important to understand how the business’ value has been calculated. Finally, it is crucial to understand the current financial health of the company: take a look at the income and expense reports, balance sheets, and profit and loss statements.
Preliminary Negotiations
In this stage, parties will discuss and clarify certain matters. A further look into the workings of the business will be in order. Examine the tax records for the previous five years, the leases for real property and equipment, employee contracts, and any union contracts. Determine the date by which shareholders or board members must approve of a sale. If any governmental approvals are required, determine the party responsible for obtaining such approvals. If any key employees are to be retained after the purchase of a company, you may have to draft new contracts; if employees are not to be retained, you may have to provide them with compensation. Finally, set a date by which any contracts with third parties must approve existing contracts to be continued.
At this stage, it is also customary to do the due diligence, which is an investigation of the seller that looks into assets and liabilities. This is done to ensure that the company truly offers all that it says it does. Also usually handled at this time is the letter of intent. The letter is a way for the parties involved to demonstrate a serious intent to do business. Usually, the letter of intent is not binding, and does not legally obligate the parties buy or sell. However, parts of the letter can be made binding and enforceable. The letter should contain items such as: the timeframe for which the deal will be open; a binding confidentiality agreement that will retain sensitive information in confidence on the part of the buyer; and a binding promise on the part of the seller to not negotiate a sale with any other purchaser for a period of time.
Pre-Closing and Formal Agreement
This is the final agreement that formally addresses the result of negotiations. This agreement will usually undergo many revisions before it is finalized and signed at the closing. During this time, all inventories must be inspected, all contracts must be reassigned, and a bill of sale should be made for assets being sold. Finally, arrange an escrow that will hold the money until all conditions of the sales agreement have been met.
Closing
Closing is the paper-intensive process of finally completing the deal. During this time, you will make sure that all documents are signed; disburse proceeds by releasing escrow to the seller, paying any unpaid taxes, and settling with any creditors.
Your attorney can help to guide any of the processes that make up the purchase of a small business. Your attorney can namely help to answer questions about how: long the process will take, how to be sure that a seller has provided accurate information and documentation, and with whom lie the responsibilities associated with securing an escrow agent.
