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Checklist of Legal Issues When Buying or Selling a Business
There are many legal issues to consider when buying or selling a business. It is a complicated and confusing process. You are going to need a talented and skilled corporate attorney to help.
Here is a quick checklist of legal issues to consider and resolve:
Structure of the Deal: Stock Purchase v. Asset Purchase?
It is difficult to decide the structure of a deal in the abstract and, sometimes, a deal starts off as one structure, but ends up as the other. There are many variables that determine whether the deal is best structured as a stock/securities transaction or as an asset transfer. Among the issues:
- Assumption of the seller’s debt;
- Avoiding assumption of debt (even accidentally);
- Encumbrances and liens on the assets (contractual, UCC, tax, etc.) preventing an asset transaction;
- Possible regulatory hurdles; and
- Securities laws and regulations implications.
Getting or paying the “right” price is not a legal issue per se. That is more of a business decision. But still, a good lawyer will ask two questions: “Are you paying/receiving a fair price?” and “Are you paying/receiving the price you wanted or — at least — that you can live with?” Obviously, these are different questions, but they are interrelated.
It is probably wise to obtain a professional appraisal. They are sometimes costly, but an appraisal can help manage your expectations concerning what is a fair sales/purchase price and what price you want.
What is Being Bought/Sold
How the deal is structured and how the deal is priced depends on what type of business is being bought and sold. A short list of possibilities:
- Turn-key currently operating business expected to keep running in much the same manner;
- Currently operating business but only some parts of the business are thriving;
- Business in decline;
- Business not currently running — could be revived; or
- Business not currently running — no expectation that business could be revived.
What is in the Catalog of Assets?
Likewise, how the deal is structured and priced depends on what is in the catalog of assets. Again, a short list of possibilities:
- Real property or leasehold interests;
- Domain names and other internet based assets (websites);
- Intellectual property like patents, trademarks, copyrights, and trade secrets;
- Customer lists/accounts;
- Income flows and other regular receivables;
- Tangible assets (e.g., raw material inventories);
- Mineral leases and other exploration/exploitation rights; and
- Talented staffing.
Why is the Business Being Bought/Sold?
The parties’ various reasons for seeking the transaction can impact how the deal is done. Here is a short list of possible reasons for the buyer:
- Entry into market;
- Expansion of already existing market share;
- Access to seller’s trade secret or business model or process;
- Desire to hire key employees/talent of seller; or
- Exploitation of upstream or downstream synergies.
Payment, Financing, and Release of Liens
How the deal is structured and priced also depends on what is needed concerning payments and what is available with respect to financing. Again, a short list to consider:
- Cashing out/lump sum payment required;
- Seller financing options — if available, what are the terms and conditions?;
- Third-party financing — what conditions are set by the third-party lender?; and
- Need for hold-back and claw-back provisions.
It is rare for any business to be completely free of debt and other financing. Thus, seller must obtain the release of any existing mortgages, notes, UCC financing documents, and other encumbrances.
Whether the deal is structured as a stock purchase or as an asset sale/purchase, various issues must be resolved and included in the contract documents including:
- Due diligence;
- Conditions precedent — what has to be completed prior to closing;
- Conditions antecedent — is it wise to have any?;
- Seller representations and warranties; and
- Buyer representations and warranties.
Additional Important Agreements
Almost every sale/purchase involves additional agreements that effectuate the parties expectations. Among the possibilities:
- Consulting agreement(s) — if key employee(s) will stay on for training;
- Employment agreement(s) — particularly if key employee(s) will stay on permanently;
- Noncompete agreement;
- Confidentiality agreement;
- Indemnity agreements;
- Bill of Sale and assignments for tangible property;
- Deeds and related documents, if real property is included;
- Assignment of lease, if a leasehold is included;
- Assignment of intellectual property rights; and
- Buyer insurance policies.
Finally, every sale/purchase involves some documentation related to governmental, regulatory or taxing authorities. Among the possibilities:
- For the deal itself, applicable sales tax declarations, disclosures, payments;
- For the business (if it sells goods and services), certain releases related to sales tax payments (e.g., bulk sales releases);
- Release and satisfaction of payroll, unemployment taxes, and other liabilities;
- Filings related to workers’ compensation obligations;
- Transfer or termination of business licenses;
- Filing with applicable agencies if the business/industry is regulated; and
- Amending corporate filings (as needed).
Contact San Diego Corporate Law
For more information, contact experienced corporate attorney Michael J. Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has many years of experience handling all aspects of the sale or purchase of businesses in California. Mr. Leonard can provide advice and guidance on the complex issue of whether an asset sale/purchase is preferable to a stock sale/purchase. Contact Mr. Leonard by email or by calling (858) 483-9200.
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