12 Things You Need to Know About Buying or Selling a Small Business

When buying or selling a business there are many issues to consider and ultimately resolve in order to ensure that both parties receive what they have bargained for.

Every transaction is unique and will require the assistance of your attorney, CPA and other trusted advisors, but at a minimum, the following should be considered:

Confidentiality/Non-Disclosure Agreement

When entering negotiations for the sale or purchase of a business and before divulging sensitive and confidential information, both parties should sign an agreement that protects them from the unauthorized use and disclosure of that information to third parties, including competitors and employees.

 

Purchase Price

What is the purchase price for the business and what type of financing will be provided? Will the Seller be financing all or a part of the purchase/sale?   If so, what are the terms of the note (interest rate, term of note, amortization period, first payment due, etc.).   Will the Seller be requiring any collateral on the note and if so, what collateral will be required? Will a bank or other commercial financing company be providing funds for all or a part of the transaction?  If so, what are the terms?

 

Terms or Conditions of Sale

What are the terms of sale – Are there any contingencies or conditions that have to be met before closing? Will the Seller be required to sign a Non-Compete, Non-Solicitation or similar Agreement?  If so, what restrictions will be imposed and for what time period? Will the Seller continue as an employee or independent consultant for some period of time after the purchase of the business?  If so, what are the terms? Will the Seller be providing any training after the purchase?  If so, will additional compensation be paid for this arrangement – or not?  What is the extent of the training to be provided by the Seller after closing, and for what period of time?

 

Is the building where the business is located, owned by the Seller or by a third party?  If leased, the parties will need to discuss the sale with the landlord and obtain an assignment of the existing lease at closing. Are there any inspections that need to be conducted before closing?  At a minimum these should include a review of all financial records, tax returns, rent rolls for existing tenants, environmental and building inspections, and an inspection of the physical assets of the business.

 

Is the permission of a third party needed before the business can be sold?  Is there a franchisor, bank, landlord, lease on equipment, licensing from City or State, industry specific requirement, joint venture or other agreement with third parties that need to be investigated?

 

 

Asset Purchase or Stock Purchase

Is this going to be a purchase and sale of assets of the business or of the stock of the business?  This should be carefully discussed with your attorney and CPA before any final decisions are made as there are significant legal and tax implications.

 

  • If it is a purchase or sale of assets: What assets are being sold as a part of the transaction? Normally the parties will consider a sale of the trade name, equipment, furniture, fixtures, goodwill, inventory, transferable insurance policies, contracts, cash on hand, vehicles, accounts receivable, customer lists or accounts, website, phone number, intellectual property, other assets.  A complete list of all assets being sold will be required in order to complete the transaction.  With the assistance of their CPA, the parties will also need to agree to a tax allocation of the purchase price among the purchased assets.

 

  • If it is a purchase of stock: Who are the stockholders of the entity and are there any corporate documents between the stockholders that will restrict the sale of stock? Look for Bylaws, Buy/Sell or Cross Purchase Agreements, Shareholder Agreements, Stock Pledge Agreements or any other documents that apply to the transfer of stock in a corporation or membership interests in an LLC.

 

Excluded and Leased Assets

Are there any assets being used in the business which are owned personally by the Seller or which are being leased by the Seller from a third party?  You will need to have a complete itemized list of all excluded assets at closing.

 

Are There Any Liabilities?

Has the Seller signed any real estate or equipment leases, obtained a line of credit or entered into any contracts with third parties, the IRS, employees, banks or creditors that will affect their ability to transfer the business free of any claims?   If this is an asset purchase, is the Buyer agreeing to take on any of the liabilities of the Seller?

 

Pro-rations at Closing

How will the parties pay for and transfer inventory on hand at closing, cash on hand, pre-paid property tax, insurance premiums, rent deposits, prepaid equipment lease deposits, utilities deposits, etc.?

 

Proprietary Rights

Does the Seller own or have any proprietary rights to the website, social media, software, the trade name of the business, any recipe, copyright, trademark, patent or other protected intellectual property right?

 

Franchise

Is the business a part of a franchise or some other similar venture?  If so, you will need to obtain the franchise documents and obtain the approval of the franchisor in order to complete the transaction.

 

Paycheck Protection Program

Has the seller obtained a PPP loan which has not been forgiven or repaid?  If so, the purchase of the business will not be able to close until the PPP loan is resolved.

 

Employees\Contracts

Are there any employment agreements, an employee handbook, benefits and retirement plans or other employee related agreements?  Will the buyer be hiring the employees and if so, what are the terms?

 

Closing Date

When will actual transfer of the business take place?

 

We Can Help

Every business has its own unique requirements.  For that reason, it is important that you provide your attorney, CPA and other trusted advisors with as much information as possible about the transaction.  These are complex transactions with significant legal, tax and business implications, all of which will need to be discussed with your attorney and other trusted advisors in more detail.  You should also discuss any personal concerns you have as well as your goals and objectives for the business purchase or sale. If you are considering buying or selling a business and need assistance, give Davis Law Group a call an schedule a no-charge consultation with one of our highly experienced business attorneys.