Each purchase or sale of a business is different and unique. Below is an
article I have written which sets forth general information. Please feel
free to call me to discuss your particular situation.
Buying or Selling a Business
Buying a business can be an exciting, yet nerve racking,
experience. It is also a process that contains many potential
pitfalls, some of which can prove extremely costly.
Before you commit to buy a business, make sure that you have
done your homework. This is especially the case if this is a new
type of business for you. In order to do this, you will need a
good accountant and attorney. Your accountant will be able to
review the financial records of the target company and let you
know if the asking price is reasonable, as well as point out any
financial or tax irregularities. Likewise, your attorney will
prepare or review the transaction documents and conduct a "due
diligence" investigation.
Typically, a business can be bought in one of two ways, via an
asset purchase or a stock purchase (mergers are another method,
but are less common in small business sales). If you are buyer,
you should aim to purchase the business by means of an asset
purchase. This means that you will buy specified assets of the
business, without incurring all of the liabilities of the business
(including hidden liabilities). Having said that, the seller may
insist on the assumption by the buyer of certain liabilities
(e.g., a lease). However, a liability is only assumed by the buyer
if it is expressly listed as an assumed liability in the asset
purchase agreement.
Conversely, a seller will usually prefer for a stock purchase.
In this case, the purchaser buys the shares of the seller’s
corporation. In doing so, all of the corporation’s liabilities are
automatically assumed. From a buyer’s standpoint, this is usually
something to avoid. However, there are certain times when a stock
purchase is better for a buyer. This typically occurs when the
corporation owns certain licenses or is a party to important
contracts that cannot be assigned.
The due diligence phase is fairly time and effort consuming. It
is, however, crucial. First, your attorney will submit a due
diligence request to the seller of the business. This request will
ask for documents and information from the seller regarding a
variety of matters including: present and past litigation, tax
matters, employee and labor relations, material agreements with
third parties and environmental law compliance. Aside from the
request, your attorney will conduct a litigation search as well as
a UCC lien and judgment search.
Assuming that the due diligence comes up "clean" (i.e., there
are no problems), the transaction will proceed to closing. At the
closing, the final transaction documents will be executed and
money will exchange hands. After the closing, the parties may
continue to have obligations under the contract. These will
typically consist of: loan payments (if the seller financed the
deal), on site business assistance by the seller for a specified
time and non-compete restrictions on the seller.
If you plan the transaction carefully and use the right
professionals, everything should go smoothly. However, failure to
plan or use competent professionals will probably prove a very
costly mistake.
