Business Law

Planning for Buying or Selling a Small Business

If you're buying or selling a small business, there are literally dozens of things that you need to do and think about. No matter how small the business is, the process of selling or buying is a complex matter. The underlying goal, of course, is simple: you need to make sure that you're getting a good deal.

To achieve your goal, it's critical that you devise a plan for buying or selling the small business. In order to devise a good plan, you need to have a lot of information and be ready to ask (or answer) a lot of questions. In addition, you need to consider the various ways in which a business can be bought and sold, including:

  • Purchasing the business's assets
  • Buying the business's stock
  • The merger of two or more existing businesses

Again, the buy-sell process can be long and complicated, so you need to pay attention to all of the details. Of course, if you get stuck, an experienced business law attorney can help you achieve your goals.

Some Questions to Ask

Literally, there are a multitude of questions that you need to ask the other party, and yourself, when you're in the market for buying or selling a small business. Some questions you need to ask yourself include:

  • Can you give the time commitment needed to run a business?
  • What type of business do you want to buy?
  • What will you do after you sell your business?
  • How much can you afford to pay for the business, or what's the best price you can get for your business?

More importantly, there are a number questions that you need to ask the other party, which often will require that you organize some information or prepare certain documentation. You will want to find out:

  • Why is the business being sold- is there a problem with the market for business's goods or services?
  • What's on the business's balance sheet: what are its assets and liabilities, that is, what does it own, what does it owe, and to whom?
  • Where are the business's assets, that is, where's the real estate, inventory and equipment located?
  • Who are the business's vendors or suppliers, and is the business currently on good terms with them?
  • Are the business's tax returns, financial statements, and other business records accurate and up-to-date?
  • Who holds title to the business's property, that is, is the property in the business's name or the name(s) of partners or an individual owner?
  • Does the business lease the building in which it operates, and if so, will the lease continue after you buy the business?

The more information you can gather, the better you can plan for a successful purchase or sale of the business.

How Businesses Typically Are Bought & Sold

A stock purchase is when the shareholders of the seller-corporation sell their shares of stock in the corporation to the buyer for cash. If you're the buyer in this situation, you will take over the seller's business "as is." You take over the seller's assets, but you also take over its liabilities and debts.

In a stock purchase, you automatically become the owner of the seller's property, such as equipment, inventory, real estate, licenses, and intellectual property, like patents and trademarks.

Usually, sellers prefer a stock purchase agreement because of favorable tax consequences, such as capital gains and loss treatment on the sale of their stock, and because the buyer assumes all debts and liabilities of the corporation, thereby freeing the stockholders from those debts and liabilities.

An asset purchase is when all or some of the seller's assets, like equipment and inventory, are sold. The seller keeps the stock in the company (if there is any), and the parties then negotiate on what assets and liabilities the buyer will take and which the seller will keep. Or, it's possible to negotiate a sale in which the buyer acquires assets without any liabilities.

Unlike in a stock purchase, in an asset purchase, the buyer will need to have assets transferred to him or her retitled in his or her name. So, if you buy the seller's real property, you'll need that change of ownership recorded in the public records.

Overall, buyers prefer this type of transaction because they can get assets without liability, unlike in a stock purchase. And, buyers get a "step-up" in tax basis for the business assets, which usually means you have more to depreciate.

A merger is when two (or more) businesses, usually corporations, combine to form a new, single corporation. Most often the new corporation, called the "surviving" corporation, will issue new stock to shareholders of the "old" corporation, the one being absorbed into the new and surviving corporation, in exchange for their shares of stock in the old corporation. As with a stock purchase, title to the old corporation's assets is automatically transferred to the survivor, and the old corporation disappears.

Questions for Your Attorney

  • If I buy an existing company's assets or all of its stock, do I have to keep all of the seller's employees, or can I fire everyone and bring in my own staff?
  • How can I be sure that a seller is giving me accurate information about its tax and financial records?
  • Can I insist that buyer have pre-approved credit or financing before I agree to sell him my business?
  • I bought a small business that sells widgets, but the seller recently opened a new store and he's selling widgets again. Is there anything I can do?
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