Buying and Selling a Small Business

On June 21, 2012, in Corporate, by John A. Weber IV, ESQ.

How are small businesses transferred?

Small businesses are mainly transferred in two ways. Buyers can either acquire a company’s stock, or acquire its assets. In asset transfers, buyers simply purchase all or most of a business’ assets. In some cases the buyer will be able to continue the business essentially as it was before. In stock transfers, buyers purchase all of a business’ stock. In that case the buyer will own everything the business owns, and will simply step in as the new operator of an already existing legal entity.

Each method of transfer offers its own advantages and disadvantages to the parties. For example, when buyers purchase the stock of a company, they acquire the legal entity itself – along with all of the liabilities that the entity took on under the previous owner. If a buyer doesn’t properly evaluate the company before the purchase, the buyer risks taking on hidden liabilities, or being bound by long term contracts agreed to by the previous owner. On the other hand, the business’ contracts, leases, or other agreements may be assets. For a number of reasons – changes in market conditions, for instance – a new owner may not be able to reach agreements with terms as favorable as those that are already in place with an existing business. In this case, a stock transfer may be the only way a new owner can maintain the terms, and advantages, of existing agreements.

Besides these legal issues, taxes will also influence parties’ decisions. With regard to taxes, stock transfers generally favor sellers, while asset transfers are better for buyers. But in any case, a qualified accountant should be consulted about the tax implications of any business sale.

While performing the legal review, a Buyer’s attorney will examine all legal documents related to the business. Attorneys will want to inspect a business’ organizational and operational documents, including articles of incorporation, bylaws, and operating agreements. An attorney will need these documents, amongst others, in order to ensure that the seller has the power to sell the business, and has acquired consents from all necessary parties. The attorney will review any leases, franchises, employment contracts, or other existing business agreements. Additionally, the buyer’s attorney may also want access to board meeting minutes, or other corporate records.

Besides these documents, a buyer’s attorney will inform the buyer of any regulations, zoning issues, or other laws that apply to the business or its property.

All of this might seem rather intrusive to the seller. Some of the information obtained during this review period can be very precious to the seller. It is obviously important to the seller that information such as trade secrets and client lists remain confidential. At the same time, buyers may be hesitant to make a purchase if all information isn’t disclosed. Parties usually sign confidentiality agreements in order to avoid this dilemma. With these, buyers agree to use information gained during the review solely for the purposes of evaluating the business.

If you are considering buying or selling a small business and have legal questions, call The Law Firm of Vaughn & Weber to speak to an attorney who can assist you at 516-858-2620!

*contributions to the research for this post were made by Jason Bernard Mays, J.D.

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