Buying, selling or merging businesses is a very complex matter that has long term ramifications. Very few business owners do this on a regular basis, whereas we do. Both legal and accounting expertise should become involved very early in the process because decisions made at the beginning of the process can make dramatic changes at closing and in the tax treatment of the transaction. Early decisions can also reduce the overall amount of money spent on professional fees.

ASSETS VERSUS OWNERSHIP

One of the first, and most important, determinations is whether to buy or sell assets, or buy/sell the business ownership (e.g. stock). This distinction is critical. This one issue has very dramatic tax consequences both to buyer and seller. Often this decision shifts taxes from one party to the other, and the party who first seeks legal and accounting advice can come out ahead by moving tax liability to the other party. Don't be the one to wind up behind the 8 ball.

Buying or selling assets is very different than buying, selling or merging a business. A person who acquires an entire business takes everything-all contracts, warranty obligations, debts, claims and such. This is typically very beneficial for the seller, and a trap for the unwary buyer. It is critical for buyers to know exactly what obligations and debts they are assuming. A buyer's professional fees for due diligence will usually be greater than a seller's in this scenario.

Generally, asset purchases are simpler than purchasing the entire business. Buyers of assets are typically most concerned about the title and condition to the assets, and the enforceability of the agreement. Typically, this takes less professional time (and thus expense) for all parties to accomplish, particularly for the buyer. Buyers of a business are concerned with all that is involved in an asset purchase agreement, plus the debts owed by the business, the contracts of the business, and any warranty obligations owed by the business.

The income and franchise tax treatment differs greatly depending on whether the sale is of assets or ownership.

DUE DILIGENCE

Due diligence refers to the efforts undertaken by a party and their professional advisors to evaluate all aspects of a transaction and the assets being transferred. Typically this includes:

Different assets require different amounts of due diligence. Buying an entire business typically requires much more due diligence than buying the assets of that business.

An early meeting between the principal and their legal and accounting professionals can set the parameters for any due diligence needed, which can help set a reasonable closing date. Progress can then be more easily monitored to make sure the deal closes with fewer surprises along the way. This also helps ensure the transaction closes on the desired closing date.

WHAT MAKES THE DEAL DIFFICULT

The dollar amount of the transaction does not indicate the level of difficulty involved in the transaction, and we don't decide to accept representation in transactions based on the amount of dollars involved. Issues such as the following more often determine a transaction's complexity:

OUTLINE OF A TYPICAL SALES CONTRACT

A typical acquisition agreement includes the following provisions:

• Identification of Buyer and Seller
• Description of the assets or business being sold
• Description of the assets being excluded from the sale
• Lists of the liabilities being assumed by the buyer and those retained by the seller
• Purchase price, and payment terms, if any
• Closing
• Documents to be delivered by each party at closing
• Non-competition and non-solicitation provisions
• Financial reporting requirements, if seller financed
• Representations and warranties of the parties
• Conditions to Closing
• Termination provisions, and remedies for breach
• Indemnification
• Alternative dispute resolution (e.g. mandatory arbitration)

These are modified and deleted, and other provisions added, depending on the particulars of the specific transaction.

REPRESENTATIVE TRANSACTIONS

Following is a list of selected transactions representing the type of matters we have handled in the past:

• sale of business (stock sale by the shareholders) for $8 million
• purchase of business (asset purchase by partnership) for $2.7 million
• capital infusion from venture capital fund for $1 million
• sale of business (assets of the business) for $350,000
• sale of business for $475,000
• purchase of business, including real estate, for $750,000
• purchase of professional practice for $185,000
• sale of professional practice for $375,000
• formation of professional partnership valued at $575,000

FOR MORE INFORMATION

Please visit The McTexLaw Business Owner's Resource Center for more information and recent case updates.

CONTACT US

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