Buying or selling a business can be gratifying for those who take the time to consult with their advisors and plan in advance. Current and prospective business owners may find it helpful to view the transaction in phases to better manage the process and to take advantage of the opportunities that will arise as the transaction moves from conception to closing.

Tanner & Guin has utilized our specialization in business and corporate law to compile the following guide to help you navigate these phases. We will go into each of these in greater detail:

• Phase One: Assess the Climate; Make the Decision to Buy or Sell
• Phase Two: Get Started
• Phase Three: Negotiate
• Phase Four: Document
• Phase Five: Investigate
• Phase Six: Close the Deal
• Phase Seven: Focus on Post-Closing

Phase One: Assess the Climate; Make the Decision to Buy or Sell

Why and When?

Businesses are bought and sold for many reasons, including the advancing age of an owner, a desire to transfer assets to the next generation, the decreasing desire or ability of the owner to look after all of his or her business interests, the desire to start a new enterprise, or simply the wish to "cash out." After the decision to buy or sell is made, discussions with business advisors, such as an accountant and a transaction attorney, begin. Pricing the assets to be sold or acquired should be done early in the process. 

How Much?

Ultimately, any business property is worth what a purchaser will pay and a seller will accept. Again, an accountant and a transaction attorney can offer advice. Once a target sale or purchase price has been established, the purchaser and seller should begin to make any necessary arrangements to prepare for the transaction. The purchaser must ensure access to the amount of needed financing.

Transaction schedules and timetables can be unpredictable, and advance preparation to meet lender requirements is worthwhile. The seller must also develop and/or organize due diligence materials; prepare or locate corporate minutes, contracts, and leases; formalize oral agreements; and clean up delinquent accounts. Additionally, opposition to a sale from minority owners or other co-owners could initiate a buy-out of minority interests in the business.

Phase Two: Get Started

Transaction Team

Each member of the "transaction team” plays an important role. The accountant reviews the financial information provided by a seller, makes projections of returns on investments, and gives advice as to an acceptable purchase price. The transaction attorneys on both sides of the deal usually drive the negotiations, often after the principals have reached a "handshake agreement" on significant issues, and are charged with preparing the transfer documents and closing the transaction. 

Confidentiality and Letters of Intent

The parties should enter into a confidentiality agreement when the transaction team is assembled, but before the purchaser obtains financial and other information from the seller. Upon advice of business counsel, the buyer and seller should consider entering into a letter of intent, which can be combined with the confidentiality agreement. Letters of intent are designed to be enforceable but not quite a "contract" and parties should understand whether a binding agreement or merely an expression of interest is being signed. 

Industrial Incentives

The parties should investigate the availability of industrial incentives if the purchaser intends to expand a manufacturing business. Those incentives can take the form of property tax abatements, sales and use tax abatements, site preparation grants, infrastructure grants, state income tax credits, credit enhancement facilities, and low-interest loans. The transaction attorney can advise which of these may apply to the transaction. 

Operating Entity

Choice of the entity (limited liability companies, various types of partnerships, corporations, and proprietorships) in which the new assets will be held is an early decision. Tax, liability, and incentive concerns drive this choice. The accountant and transaction attorney can advise as to which entity provides the best combination of favorable tax treatment, incentives, and limited liability.

Stock or Asset?

The purchaser and the seller should also give early consideration to whether the transaction involves the purchase of stock or assets. Most transactions are asset purchases because a stock purchase causes assumption of all previous liabilities. 

Terms of Sale

The terms of the sale are negotiated when the price range has been set, the legal entity for the acquisition is chosen. and the purchase of assets or stock is decided. Variables can include owner financing, seller involvement in the business after closing, non-competition agreements, purchase price allocation, and valuation of the selling company's goodwill. 

Phase Three: Negotiate

Risk identification and allocation define the negotiation phase. Advance understanding of document control and information flow is critical to a realistic judgment of what risks are acceptable to both sides. Some risks remain with the seller, while the purchaser undertakes others. The transaction attorney can assist the parties in their decisions based on the proposed purchase price.

Phase Four: Document

Depending on the type of business being bought or sold, the transaction documents can include the main purchase agreement, closing certificates, purchase price allocations, deeds, leases, bills of sale, assignments, other instruments of conveyance, legal opinions, release agreements, non-competition agreements, notes and security instruments related to seller-financing, if any, and investigative reports (environmental, structural, and appraisals). 

Purchase Agreement

The purchase agreement contains the basics of the transaction, purchase price and payment terms, description of what is being purchased, representations and warranties by each party, each party's conditions to closing, indemnification, and any escrow terms. It is important that the purchase agreement contain specific termination provisions so that the parties can be released to look elsewhere if they are unable to fulfill closing conditions within a specified period of time.

Phase Five: Investigate

Due Diligence is Critical. Purchasers must exercise care to obtain a complete picture of the business being purchased. Sellers must also be diligent because a purchaser's post-closing financial stability is critical to the purchaser's ability to stand good for indemnification obligations. In addition, it is very important to determine how the business being purchased fits within the regulatory framework within which it operates. In other words, is the business in compliance with applicable governmental regulations.

Accounting, Business, and Legal Inquiries

The accountant verifies that the financial information provided by the seller is in order. The purchaser will want to obtain assurance that markets and customer will still be around after the transaction. From the legal side, the transaction attorney reviews the seller's contracts and leases, real estate documents, any regulatory actions or litigation pending against the seller, and the strength of the seller's claim to its assets, tangible and intangible. 

Environmental

Environmental compliance is a tremendous concern in any transaction involving the purchase or lease of real estate or the operation of an environmentally sensitive process. The transaction attorney generally engages the services of an environmental engineering firm to assess (a) the status of the business property, (b) whether all necessary discharge and operation permits are in place, and (c) what environmental risks may accrue to the purchaser. The transaction attorney also helps evaluate which permits can be transferred, which permits require new applications and approvals, and what additional permits may be required.

Employment Risks

Given the proliferation of federal regulations governing the workplace, a purchaser must carefully analyze the relationship between the seller and its employees and take account of any pending or potential claims. In addition, the purchaser must assess the extent and expense of employee benefit plans that may be assumed and analyze any formal employment or union contracts with employees. 

Intellectual Property

Because of the developing nature of the law in this area, careful documentation of ownership of those assets and meticulous attention to the transfer arrangement are required to give the purchaser the benefits of those assets. If the seller has not taken steps to register its proprietary information, that responsibility should be allocated between the parties in a considered fashion. 

Antitrust

Depending on the size and the nature of the transaction, the parties may also need to address antitrust concerns. In a major deal, counsel must make a determination that the antitrust restrictions do not apply or that an appropriate clearance has been obtained from the government. 

Third-Party Consents

Third-party consents are necessary where third parties have entered into leases, contracts, or other arrangements with the seller in order to continue those arrangements with the purchaser after the close of the transaction. Obtaining such consents sometimes takes delicate handling and can present an opportunity for a third party to try to terminate its business arrangement with the seller. 

Phase Six: Close the Deal

The days and weeks leading up to closing are typically filled with many emails as drafts, revisions, and various disclosures are transmitted between and among the parties and their advisors. Both sides must be flexible and may need to leave certain matters to be concluded after the closing. From the purchaser's standpoint, however, it is very important that any risks associated with such post-closing details be taken into account in the purchase price, since the purchaser has very little leverage to make the seller cooperate after payment has been made. 

The closing typically involves the execution of numerous documents, some of which will need to be filed with local, state, or federal government offices. The timing of the transfer of funds is determined based on when the purchaser can be confident of clear title to the assets. 

Phase Seven: Focus on Post-Closing

A plan for post-closing public relations matters, such as press releases and notices to employees, customers, and vendors can alleviate fears and concerns and make the new owner's path to assumption of responsibility a smooth one. Post-closing adjustments may be necessary based on the business's work in process. Successor liability considerations may exist if claims are made or litigation is filed against the business after the closing. 

Conclusion

The business seller or prospective purchaser who plans in advance and anticipates the hurdles to be cleared will be in a good position to minimize frustration and maximize returns on the transaction.

If you have any questions about buying or selling a business, please contact Hannah Morgan at hannah@tannerguin.law or (205) 633-0279.