Buying and Selling a Business
The business attorneys at Danziger Shapiro & Leavitt have collectively over 45 years worth of experience representing either buyer or seller in connection with the sale of their business. Whether the sale is simply the transfer of a nail salon to a family member or one company acquiring a division of another company, there are certain basic questions that each party must consider:Seller Considerations When Selling a Business
- Reasons Behind The Sale. At the outset of every sale, the seller needs to understand exactly what and why he or she is trying to accomplish by the contemplated sale. By sitting down with you and discussing what is driving your sale considerations, our attorneys will help you focus on what you are trying to accomplish. Only once this first step takes place can you truly know what you want to sell, or if you want to sell in the first place. For example, our attorneys recently met with a client who was certain he wanted to sell his business and its technology but at the conclusion of our meeting, we mutually agreed that the best course of action was a license agreement with the contemplated buyer.
- Financial Information and Business Records. Once the decision has been made to sell a business, the seller needs to make sure all financial information is up to date so that an accurate sales price can be determined. The seller will want to work closely with its accountant and have financial statements for the last several years. Financial statements should include both profit and loss statements and a balance sheet. A formal business valuation may also be needed depending on the size of the transaction. The small mom and pop store may have to create these agreements for the first time while the more sophisticated businesses will already have its financials in order. Regardless, we frequently work with our clients and their accountants to get this information in order. We also work with our clients to make sure its business records are up to date as well. Are all corporate resolutions, shareholder agreements and the like reflect what has transpired over the years? It is not unusual for the business to require a little "housekeeping" to tidy up its internal documents prior to a sale.
- Brokers How will I locate potential buyers? Is this a strategic sale to a specific buyer? Or will I need a more generalized marketing campaign and need the help of a broker to markey my business. If the latter is the case, care must be given before you sign any listing agreement with a broker. All broker agreements are different and have different requirements. Care should be given before you sign any broker agreement and we have the experience to guide you.
- Important Contracts and Leases. Consideration should be given to important contracts such as leases, supply contracts and license agreements. Is the value of your business tied to these contracts? If so, are they in writing, are they transferable and how many years remain under each contract? The answer to these questions will significantly impact your business valuation. The attorneys at Danziger Shapiro & Leavitt will review these agreements and together we can decide whether changes are needed to increase the value of your business.
- Intellectual Property. Review all ownership interests in intellectual property (website, copyrights, trademarks, patents etc...) are readily identifiable and registered where appropriate.
From a buyer's perspective, it all begins and ends with due diligence. Only through a careful evaluation of all aspects of the target business (or assets) can a buyer make a proper determination if it want to buy a business. The Danziger Shapiro & Leavitt attorneys will work with you to create a due diligence checklists that fits your transaction and cost structure. Due diligence may simply be a title and UCC search. Alternatively it may be much more complex and require us to review any or all of the following issues:
- Liens on assets (bank and tax)
- Condition of assets
- Environmental issues
- Pending or threatened lawsuits
- Critical contracts - identification of time remaining and change of control issues
- Critical employees
- Non-compete or other restrictive agreements
- Shareholder disputes among sellers
Business Entity. We also routinely work with our client to counsel them regarding what business entity they should form when they purchase their business. There are many choices to consider such as the S corporation or the Limited Liability Company known as more commonly as the LLC. You can click here for more information regarding choice of business entity.
- Deal Structure. Due consideration must also be given to whether you want to buy only the seller's assets or stock. Generally an asset sale is better because it limits your exposure because the seller's liabilities remain with the seller and do not carryover. However, under certain circumstances it may be advisable to keep ownership of the assets in the same business entity and therefore a stock sale is the best way to proceed. Regardless of the issues, we are able to advise you as to the best way to proceed after we sit down with you and discuss the transaction and what you hope to accomplish. The liability concerns associated with stock transactions can be effectively mitigating with appropriate indemnification agreements.
- Financing. With any deal, cash is always king. The way a deal is structured from a financing perspective depends on all of the above variables. However the ultimate sales price will also always depend on how much hard cash is on the table. If seller financing is part of the deal, sale price goes up as oppossed to the seller walking away from the table because the buyer was able to finance the entire transaction itself or though third parties (investors or banks). One of the most common mistakes we see is a buyer who closes on a deal but does not properly anticipate or make allowance for operating capital post closing. Through our experience we can assist you with making proper allocations so that you can survive.
Last but not least, a buyer must consider how the business will be managed post closing. Who will run the business on a day to day basis? How will the new owner manage its employees and managers who worked for the prior owner. Will there be a transition period where the old owner will work for the new entity for a period of time? If so, this should be clearly set forth in a written employment agreement? Perhaps part of the sales price should be tied to this employment agreement? Will this employment agreement have a noncompete to prevent the former seller from starting up a business across the street and competing with you. The answer is yes!
We can help you with all of these issues and the many more issues that need to be considered when you are buying or selling a business.