How To Buy or Sell a Small Business

Buying or Selling a Small Business

The sale or the purchase of a small business will typically be an asset purchase or a stock purchase.

To make an asset purchase, the buyer will purchase all or some of the business owners’ assets. Buyers favor this type of transaction because it will give the buyer inventory and equipment apart from taking on the owner’s liabilities and debts.

A stock purchase means that the buyer will purchase most of the stock of the business and take over the business as it is, assuming all the seller’s liabilities and debts. The seller will often like this type of transaction because the debts will go with the business.

In whatever way the transaction is structured, the business deal will generally look like this:

  • Initial negotiations
  • Outlining a precise agreement and the pre-closing review
  • Closing the deal

It is an excellent idea to consult a tax attorney in Atlanta as well as a financial advisor as soon as possible in the purchase process. Seeking advice and counsel from the experts will help to ensure that you will get the deal you want by minimizing liability issues and taxes, both of which are primary concerns for both buyers and sellers. Both the seller and the buyer will require the knowledge about how to structure the deal.

Initial Negotiations And Discussions

During this phase, a buyer will do an investigation of the business to determine the assets and value. An extensive review will be done to decide the value of the business. More research will be required if it is a stock purchase since the buyer will be taking on the liabilities and the debts of the business. Before purchasing the business, the buyer should learn as much as possible about the day to day routine of running the business. The buyer should know as many details as possible of how the business goes about making money.

Other elements of the sale are:

  • Is there a board of directors or shareholders from which approval is required?
  • Are there any government or other third party records or documents required?
  • Are there third party contracts that need to be approved before the buyer can take over, such as loan agreements or a lease?
  • Other concerns for discussion are the employees: will they be kept on in the business, and if so how will it be dealt with?

Customarily, both parties will draft a letter of intent in this phase to demonstrate they are serious about making the deal. Although these letters are not binding, portions of the letter should be enforceable.

The Letter of Intent should contain:

  • How long the buyer and seller are inclined to keep the deal available and open
  • A binding agreement from the buyer regarding the trade secrets, financial information, customer lists and any other business information.
  • An irrevocable contract by the seller promising not to negotiate a sale with another prospect who would want to purchase the business for a particular time duration.

Formal Contract and Pre-Closing

The formal contract and pre-closing is the completion of all the negotiations. It will consist of every detail regarding the business deal that has been made.

The terms of the deal including the price, when the assets will be turned over, escrow details and other relevant definitions that were written in the agreement. Commonly, the formal contract will go through several drafts and will be finalized before the pre-closing. It will then be signed at the closing.

During the pre-closing, there will be many details of to be careful of and to be leery of any mistakes made in the contract. Both parties should examine the documents carefully. The extent and type of contract will depend on whether it is an asset sale or a stock sale.

Closing

Closing is completing the deal. It is an intensive process with many documents and contracts. This is the time to be certain that all the documents have signatures and are notarized if it is a requirement. Deeds and lease agreements will need to be notarized.

Be positive that the proceeds of the sale are disbursed per the terms of that agreement.

Also be certain to record the documents and deeds or certificates of title of motor vehicles and any other property or equipment.

Questions To Ask Your Attorney Before Buying or Selling A Small Business

Questions to ask your attorney might be how long it will take to buy the company’s stock or assets? Another real issue is why use an escrow agent and who pays for that service? An important matter is how to be confident that you are getting accurate financial information? These are just a few inquiries for your attorney. Before you proceed to purchase or sell a business, contact an Atlanta tax attorney to resolve all these questions.

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