Tweet

BUYING A BUSINESS Legal Aspects and Considerations

Guest post by: Barry Gartenberg

Article Overview: This article highlights key legal issues surrounding the purchase of a business.

BUYING A BUSINESS Legal Aspects and Considerations

BUYING A BUSINESS Legal Aspects and Considerations PURCHASING AN ON-GOING BUSINESS is an excellent opportunity for an entrepreneur seeking the financial and personal rewards of owning and operating a business.

Buying vs. Starting a Business

A chief advantage of purchasing a business (as opposed to starting one "from scratch") is the opportunity to acquire goodwill. In essence, goodwill consists of a business' reputation, patronage and other intangible assets. Typically, a successful business develops these attributes over a period of time. Thus, the buyer can benefit by acquiring a company with some level of "ready-made" business. However, disadvantages of buying an on-going business include: (a) the price "premium" sought by the seller for the additional value associated with goodwill, (b) a greater potential for "hidden" or unknown risks, liabilities and adverse business conditions, and (c) higher transactional costs (legal, accounting and other professional fees). The following highlights some of the legal aspects and potential pitfalls of various stages of the business purchase process.

Preliminary Negotiations

The early stages of any business acquisition will entail some preliminary negotiations between the proposed buyer and seller. It is this stage where the parties will begin to explore the broad issues and characteristics of the transaction such as price, payment terms, and the legal structure of the sale (e.g. stock sale, asset sale, etc.). The parties typically converse and may exchange correspondence as well as other informal documents. It is here where the parties may unwittingly encounter their first legal land mine. There is a subtle difference between negotiation and words that give rise to a binding contract.

Letters of Intent

In some cases, a letter of intent (LOI) can facilitate negotiations. LOIs are often misunderstood and can represent significant legal risks. Many times, people wrongly view LOIs as documents that are "somewhat binding." LOIs can have binding and/or nonbinding provisions- but there is no middle ground. LOIs must be drafted with care. If a purportedly "nonbinding" LOI is sufficiently definite as to the essential terms and demonstrates an intent to be bound, courts may construe it as a binding contract, despite the document being labeled "Letter of Intent."

Primary and Ancillary Transaction Documents

A business sale/purchase may be structured in numerous ways. Popular structures include the stock sale, asset sale and merger. The legal structure of the transaction will determine the type of primary transaction contract that creates the legal obligation to transfer ownership of the business in accordance with the stated terms and conditions- for example, Stock Purchase and Sale Agreement, Asset Purchase and Sale Agreement or Merger Agreement. Depending on the nature of the transaction, a variety of other agreements, contracts, documents and instruments may be required- for example, loan agreements and promissory notes, employment/consulting agreements, stock pledges, security agreements and financing statements, personal guarantees, assignments, bills of sale, "corporate" consents, resolutions and authorizations, deeds, leases and restrictive covenants.

Due Diligence and Risk Reduction

Due diligence is the care and investigation undertaken (primarily by the purchaser) to assess the legal, financial and market risks of a proposed transaction. Since caveat emptor (buyer beware) remains the general rule of business transactions, due diligence is critically important to purchasers. The parties should delineate the scope of, and time for, due diligence and establish contingencies based upon the discovery of negative conditions as well as the parties' respective opportunities to cure same. Admittedly, due diligence is time consuming and will increase short-term transactional costs. Thus, the "appropriate" amount of due diligence may be determined by evaluating the nature of the business being sold, the dollar amount and complexity of the transaction, as well as the parties' risk tolerance. In addition, the parties may reduce and allocate the risk of a transaction through appropriate contractual language. Examples of contractual provisions that may be used to reduce or allocate risk include warranties and representations, escrows and indemnification clauses.

Time and Effort

Consummating a business sale often takes longer than the principals initially anticipate. This is due largely to the time needed to identify, evaluate, propose, negotiate, memorialize, review and often renegotiate major deal points as well as ancillary issues. The principals often expect or want the transaction to be fast and easy. This sentiment brings to mind the true story of a driver who entered the parking lot of what once was New York City's Pan Am building. (The parking lot was actually several stories up in the middle of the building. When the patron exited his car in this partially indoor/outdoor structure, he could see city streets several stories below.) The patron asked the attendant, "What's the fastest, easiest way to the street?" The attendant answered, "Jump! But if you want the safer, smarter way, take the stairs around the corner." To be sure, jumping would be faster and easier than the stairs. After all, the rate of descent would be quick and gravity would do all the work. Business transactions have something in common with reaching the street, there is a fast and easy way, and a prudent way.

In conclusion, purchasing a business implicates important commercial and legal issues. Entrepreneurs will be well served by obtaining professional advice regarding such transactions. Please contact the author if you wish to discuss this article or his practice areas.

--------------------------------------------------------------------------------

This article is provided solely for the general interest of the reader. The article and its contents are neither intended as, nor should be construed as, legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

Related Articles
  Lease Equipment
  Things to Watch Out for When Buying a Franchise
  What you Need to Know when Buying a Business
  Is an Automotive Franchise for You?
  Making a Logical Bid or No-Bid Decision
  Buying a Business FAQs
  Avoid B2B Appointment Setting Mistakes
  Interesting facts about Legal process outsourcing
  Common Pitfalls in Buying a Business – Structure of the Deal ©
  Steps on How to Start a Business from Home
  Franchise Or Independent? Can I Do It Myself?
  Law Practice Software Eases Transition During Law Office Splits
  Are You Into Legitimate Small Home Business?
  Should you buy or start a business?
  Common Pitfalls in Buying a Business – Inadequate Due Diligence ©
  RFx Legal Puts Clients’ Legal Work Through Competitive Bidding Process
  How to use incentive marketing effectively
  Child and Spousal Support-Common Law Relationships
  Creating a Franchise
  Buying a Business

Article Tags: buying a business, legal aspects, legal considerations, purchase a business, purchasing a business



Related Forum Posts
New Small Business Topic - Hello everyone, I'm on the lookout for new topics to add to my site. We just launched a Franchising section and are planning Human Resources section. Do you have any thoughts for a new section? Here's a list of what we currently have: Angel Investors Branding Bank Loans Business Coaching Business Plan Franchises (New) Insurance Legal Marketing Public Relations Sales Small Biz Loans Venture Capital
How to Make Management Profile? - Here are some tips to make a management profile which helps to attract lenders to invest in your business: 1- Tile i.e. Name of the Business 2- Legal structure of the company 3- When did it start its operation? i.e. DD/MMM/YYYY 4- Shareholders and Directors detail (if any) i.e. Name of shareholders, No. of shares and its percentage 5- Name of the Board of Directors Name and short brief about them 6- Current Manpower i.e. in numbers 7- Management and their short profile i.e. name, designation, experience and qualification 8- What services you are offering? Write it down. 9- Your Competitors 10- Main clients or Targeted clients
to incorporate or not to incorporate - If you have a lot of money and business assets tied up in your business and you've been in business a while then I would definitely look at incorporating because the advantages out way the costs and paperwork. However, if you are just starting out in business the costs and paperwork are not worth the investment to incorporate. I don't agree that it will give you a lot of tax savings. In the first few years of your business unless you making 100's of thousands of dollars when you reduce your income via your taxes the tax savings are not that much different. If you are a new business whether you are incorporated or not most business or financial institutions will ask that you put up assets before they will give you credit or loans. So I find it a myth that they can't attach personal assets. In Ontario there is a Legal Aid hot line that you can call and the lawyer you choose will give you 30 – 45 mins. Free legal advice. Check it out with a lawyer before you decide.
Re: SEEKING PRIVATE OR ANGEL INVESTOR - Definitely have a thorough and accurate business plan. In the US, you can get help at SCORE - their website is full of great information and you can check for local chapters. If you would like a book that has all kinds of great information about financing options - this one is very good --- HOW TO GET THE FINANCING FOR YOUR NEW SMALL BUSINESS: INNOVATIVE SOLUTIONS FROM THE EXPERTS WHO DO IT EVERY DAY—WITH CD-ROM This new book will provide you with a road map to securing the financing. The book goes into traditional financing methods and assists the reader in setting up proper financial statements and a proper business plan. It details the differences between debt and equity financing and how and why to use each. Valuation techniques are explained for determining what your business is truly worth. However, the book’s real strength is in explaining alternative and creative methods of financing, such as SBA financing, investor angels, IPOs, limited public offerings and venture capital. Essential resources for finding the detailed information you need are included throughout. Item # 9780910627559 $39.95 Shri
Re: I want to make money online - First, I'd say definitely online. Your $3,000 will go a lot further online than offline. Second, I'd read Kevin's list and the linked article and make a BUSINESS decision what you want to do, what you can offer and who you can sell it to. Do some serious keyword search and find a hungry niche, and this is your start (free). Second step (free): Sign up for clickbank, paydotcom or some other affiliate exchange and find suitable products to promote. Third step (free): Get a free site somewhere, but make sure it's on something that looks like its own domain - yourname.wordpress.com or yourname.blogspot.com or some such. Write some nice things that promote your affiliate products and put your affiliate links on the page. Fourth step (free): Go on article directories like evancarmiahcel.com (if appropriate) or ezinearticles.com and write stuff that is interesting for your niche, using your niche keywords. Put a link to your new site in the resource box/bio. Keep doing this until you make money. My kids (18 and 12 at the time) sold stuff on clickbank. Anyone can do this. Good luck!


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Email Marketing Made Easy #11 - Avoiding Spam

How to Sell to the Price Driven Customer

Sales is a Flawed Model

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.