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Three crucial decisions before you buy or sell a business

Three crucial decisions before you buy or sell a business

Just as with so many other things in life, it takes two to buy a business.   A buyer and seller are the main ingredients, but lawyers, accountants, brokers and other professionals are essential to ensuring that the transaction is safe, legal, and favorable to both parties.

Before you do the handshake, there are three decisions you must make.

(1) Will this be an asset purchase or a stock purchase?

There are two basic types of business purchases.  With an asset purchase, the buyer purchases the assets of the business, such as equipment, property, customer lists, proprietary information, intellectual property, contracts and agreements.  In an asset purchase, there is no exchange or transfer of the company’s stock.  The benefit of an asset purchase is that by buying assets instead of stock, the buyer assumes no liabilities other than those, if any, spelled out in the purchase agreement.  The seller remains a solvent, self-sustaining legal entity and, as such, is responsible for its own obligations.

In cases where the business is not a corporation (such as an sole proprietorship or partnership), an asset purchase is the only option since there is no stock.  However, a buyer can still purchase the entire company by declaring the company a single asset to be sold at a single price.

A second method for purchasing a business is a stock purchase By purchasing the company’s stock, the buyer becomes the owner of the company and thus controls all assets of the company, along with any attendant liens and liabilities.  An important aspect of a stock purchase is that the buyer takes on all assets and liabilities, whether the buyer knows about them or not.  The seller may neglect to inform the buyer about outstanding obligations, such as lawsuits or IRS actions.  To guard against this, the buyer may insist on a carefully constructed indemnity clause in the purchase agreement whereby the seller indemnifies the buyer for any contingent or hidden liabilities of the company at the time of purchase.

Whether to structure a business purchase as either a stock or an asset transfer requires a careful review and analysis of the business, the financial resources of both the buyer and seller, and any risk factors that may be present in the transaction.

(2) Do you want a non-compete agreement? Hint: Yes.

A buyer would most likely not want the seller to open another business in the same industry, compete in the same town, or later consult for a company that is or will become a rival.  Therefore, buyers often require sellers to execute non-compete agreements preventing the seller from being involved with a competing entity and from disclosing trade secrets and proprietary information.  Because such agreements are complicated and enforcement can be problematic, a non-compete agreement should be carefully crafted by an experienced business attorney.

(3) Do you have your team together?

One of the missteps a new business entrepreneur often makes is trying to go it alone. Today’s web-based services make it easy to complete and file registration forms and other start-up requirements. The process is simple, but the questions can be tough — and a wrong answer could jeopardize your business. That’s why we recommend your team includes at least an accountant, a tax professional, and, of course, an attorney. And, once your business is open, don’t forget a marketing specialist.

At The Hulse Law Office, we represent both buyers and sellers in business purchases throughout Key West, Marathon and the Florida Keys, so we understand the unique needs and concerns of both parties in a business purchase.  We work in conjunction with your accountant to recommend the best method for buying or selling your business, minimizing tax liabilities, and safeguarding against unforeseen risks inherent in business transactions.


Aquisitions & Partnerships

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