By Lindsey Weidenbach

With the economy in flux, we have seen an increase in business sales, mergers and acquisitions.  If you’re contemplating buying an existing business, you may be wondering where to start. After the initial discussions and negotiations, how do you move forward? 

First, you will want to decide whether you are going to buy the company itself or the assets of the company. If you are going to buy the company, you will be purchasing the seller’s stock (if it’s a corporation) or units (if it’s a limited liability company).  This option may sound like the right decision, but when you buy the actual entity, you take on any and all liabilities that it has or will have in the future.  For instance, a disgruntled employee could file a lawsuit against the company.  Even if the facts of that lawsuit relate to a period of time when you did not own the company, you could be on the hook for that lawsuit.  Unless there is a very compelling reason to buy the company’s stock or units, most clients do not choose this option. 

Most clients choose to purchase the assets of the selling company. The term “assets” includes tangible items like furniture, fixtures, computers, copy machines, trucks, and any other items of equipment. You will also be purchasing the company’s goodwill, intellectual property, name, signage, website, social media logins, and other intangible items.  Essentially, an asset sale involves anything needed to step into the shoes of the seller and run the business. 

However, when you buy the company’s assets you do not step into the seller’s shoes when it comes to their employees. The seller will need to fire all employees and the buyer will re-hire those same employees.  When this happens, the parties will need to negotiate accrued but unpaid PTO, sick leave and other benefits that the employees may enjoy. Typically, we can calculate the value of these benefits and adjust the purchase price accordingly. 

The purchase price is allocated between various classes of what is being purchased mainly because of tax implications.  The buyer will pay sales tax on equipment, but the seller will get a tax break on the amount allocated to a non-compete agreement (if that is part of your sale).  Goodwill also comes with various tax incentives to the seller.  Deciding what amount is allocated between the various items that make up the purchase price is a big part of the negotiations. 

All these nuanced decisions are at the heart of the negotiations of the purchase and sale agreement.  Before we even get to the purchase and sale agreement, most business acquisitions begin with a letter of intent.  The letter of intent is a non-binding agreement between buyer and seller to the basic terms.  This letter can include whatever level of detail that you want, but most letters are broad and set forth the purchase price, any contingencies at play (like financing or due diligence), non-compete terms, and a projected closing date.  This document is usually signed simultaneously with a Non-Disclosure Agreement, which allows the seller to provide sensitive financial and confidential information about the business to the buyer in order for the buyer to make an informed decision. While the buyer is evaluating this information, the attorneys iron out the details of the deal in the Asset Purchase and Sale Agreement. 

The details in the Asset Purchase and Sale Agreement are extremely important to your new business’s long-term success and we recommend hiring an attorney to help with this. The attorneys at Gatens Green Weidenbach offers decades of experience with agreements such as this and would be happy to discuss opportunities with you. Contact us for more information.