M&A attorney and guest contributor Brian V. Powers discusses the practical and legal considerations that arise when buying or selling a business.
When people consider buying or selling a business, they will usually think of it is as a single, simple transaction – they “sell” the business and get lots of cash in return. Not quite. As with most things in the world of business (and through the eyes of lawyers), the process of buying or selling a business can be very complicated. In fact, there are many, many methods in which to accomplish the “sale of a business” – and lots of practical and legal things to consider. In my M&A law practice, I advise clients with regard to all of these matters. Below I have summarized some of the matters you should discuss with your M&A counsel before you buy or sell a business.
The primary methods of selling a business
Outlined below are the most common methods used for selling a business.
- Stock sales: In a stock sale, the buyer purchases the outstanding stock issue by the selling corporation – or in the case of an LLC, the outstanding membership interests. The buyer typically assumes all liabilities of the Seller, unless otherwise agreed by the parties. Sellers will usually prefer stock sales due to the advantageous tax consequences as well as the assumption of liabilities by the buyer, which creates a clean break for the seller’s shareholders.
- Asset sales: In an asset sale, the buyer purchases seller’s assets, and assumes only those liabilities that it agrees to assume. Any liabilities not assumed remain the obligation of the Seller. Typically the selling company with distribute the sale proceeds to its shareholders via a dividend/distribution. With the exception of a pass through entity, the selling company will pay taxes on the asset sale, and the shareholders will pay taxes on the dividend. Buyers usually prefer an asset sale to a stock sale.
- Mergers: In a merger, the target company (i.e. the seller) typically merges with and into the buyer company, which survives the merger. This is typically accomplished by the buyer converting the stock owned by seller’s shareholders into the consideration given for the merger.
- Tax-free reorganizations: Although there are many forms of a tax-free reorganization, the basic concept of a tax-free reorganization is that buyer pays the purchase price by using buyer’s own stock as the consideration, which results in a tax free transaction, except to the extent of any “boot” received by the seller’s shareholders.
Some legal considerations when buying or selling a business
Buying or selling a business can create some unique legal challenges to everyone involved. An M&A transaction that is not properly structured from a legal standpoint can create serious problems for everyone down the road. Here are some important legal considerations:
- Make sure you hire an M&A attorney: This may sound obvious coming from an attorney who practices in this area, but without one, the likelihood that you will miss an important legal consideration in your deal increases significantly. An attorney with M&A experience will help you properly document the transaction, make sure that ongoing liabilities and obligations are properly defined, and help you move towards a smooth closing.
- Use a purchase agreement: Don’t just sign / accept a bill of sale and be done with the deal. Make sure you have a properly prepared definitive agreement between buyer and seller that clearly sets forth what is being transferred and what liabilities and obligations each party is assuming/undertaking. Among other things, a good agreement will also set forth appropriate representations, warranties and indemnity promises.
- Conduct thorough due diligence: This is, of course, particularly important for the buyer. You need to know all the details of the business you are buying – including whether of not the assets of the business are coming to you free and clear of liens.
Some practical considerations when buying or selling a business
- In addition to the legal advice and services I provide, I always try to help clients consider the other aspects of buying or selling a business. Below is a short list of the things I usually share with business owners to help them wrap their mind around the process of selling a business from a practical point of view.
- Make sure you think through the reasons you are selling a business. This may sound obvious, but there are lots of implications to selling a business. Are you tired of the business? Do you want to retire? Do you want to remain involved with the business, but just need/want the capital from the sale? All of these sorts of things should be considered when working with your M&A attorney and other advisers in determining the terms of the sale of the business.
- Is this a “family business” in which your children or other family members have an interest or expectation of long term involvement? Sometimes people sell off a closely held business without considering the options of keeping the business in the family for future generations. While this might not be a possibility or option for some, it is something I always recommend people give some thought to. There are ways to step away from the business, generate passive income, and still hand it over to family.
- Is finding the right buyer important to you? A business owner who has spent years building a business might often be reluctant to sell the business for fear of a potential buyer not maintaining the business in the vision of its founder. Some business owners don’t care about this, but if you do, finding the right buyer for your business becomes very important.
- Determine what you want to get out of the sale of your business before you begin negotiating terms. Don’t let a buyer dictate the terms when you sell a business. Before you begin the process, put a great deal of thought into what you want or need to get out of the sale. Use that as the primary driver as you negotiate terms. For people selling a business out of desperation, this might not help things all that much – but still, it is important to remember why you are selling your business as you work through the details.
Attorney Brian Powers represents business clients in a variety of corporate transactional matters, with an emphasis on entrepreneurial legal services, startup law, mergers and acquisitions, and internet law / software licensing. Indiana business attorney Brian Powers also advises established business clients on a broad range of matters, including complex business and commercial transactions, real estate, regulatory compliance, business advisory services. strategic planning, business restructurings, and general corporate counseling. His clients have included companies in the technology, software, real estate, healthcare, manufacturing, construction, advertising & marketing, hospitality, retail sector, auto auction and private equity sectors.