Buying and Selling a Business
When a business is bought or sold the buyer wants to buy the company that was intended to obtain without any surprises. The seller wants their money and to be done with it and not be faced with an attempt to rewind the sale. Battaglia, Ross, Dicus & McQuaid, P.A. represents both buyers and sellers. Our job, depending on which side we are aligned, is to see that the transaction is structured and documented to accomplish our client’s goal to every extent possible. Clients ask for our advice at different stages of the transaction. There are business tasks to be completed by the client and legal tasks to be handled by a business transaction lawyer. Some clients prefer to have a lawyer do some of the business tasks as well as the legal.
Decision to Buy or Sell a Business
The first stage is the decision to buy or sell. This decision is sometimes motivated by estate or succession planning. In a family-owned business, frequently there are multiple generations in the business and the intent is for the ownership to pass among the family. If that is known at the time of the purchase and sale, some structuring can be put in place to facilitate that planning.
A decision needs to be made whether to buy or sell the assets of the company or buy or sell the ownership interests of the existing company. These are frequently referred to as Asset Acquisitions or Stock Acquisitions. With the popularity of limited liability companies, the phrase Membership Interest Acquisitions has become a familiar term. The acronyms APA, SPA, and MIPA are used for the purchase and sale agreement. The decision has legal and tax consequences. Occasionally the buyers’ needs are incompatible with the seller needs or create increased tax consequences, and negotiations are required until a mutual agreement is reached. Adjustments in the purchase price are sometimes required in order to get to a compromise.
Another decision is whether the seller will finance some or all of the purchase price. The pros and cons, along with the risks and benefits need to be weighed along with the other considerations for the acquisition. Sometime it may be better to lose a buyer than agree to finance a part of the purchase price. If the financing is not repaid, and the seller has to take the business back, the business that is taken back may very well not have the value as the business sold. Additionally, an interruption in the cash flow from the financing that has stopped may not be tolerable. On the other hand, the risk may be one that has to be taken in order to get the business sold. Personal guarantees and additional collateral may be helpful.
The buyer needs to decide on how they want to own the business being purchased. The number of people in the buying group may affect the decision on the structure of the buyer. Frequently, the exact buyer is not known at the beginning, and the contract needs to provide for a later decision that does not penalize the seller.
Buying and Selling a Business Agreements
An agreement protecting the selling business Non-Disclosure Agreement is necessary since the seller will be disclosing the important information about the business to the buyer. Some businesses have trade secrets or other confidential information that has to be disclosed so the buyer can make a decision of whether to buy and the seller needs to know if the sale does not go through that there is not a new competitor using the seller’s information. In some businesses, this becomes a difficult agreement to reach.
Letter of Intent
A nonbinding letter, Letter of Intent or Term Sheet, is commonly used once the basic terms of the transaction are known, so the buyer and seller know they are on the same page before the attorneys are set free to prepare the purchase and sale agreement. The LOI usually contains the purchase price or the formula for determining the purchase price and how it will be paid. Some but not all of the other terms of the sale may be included in the LOI. Certainly, the terms that would cause a party to terminate the sale should be agreed to at least in concept before the attorneys start their work. The LOI is almost always intended to be non-binding. It is possible for an LOI to be binding as a matter of law, so it needs to be properly prepared.
In some sales, the buyer’s inspection of the business, known as due diligence, is done after an LOI and before a contract is signed and sometimes it is done after the acquisition agreement is signed. There are pros and cons to doing it either way, and this may have to be negotiated.
Lawyers have different degrees of involvement in Due Diligence frequently dependent on the experience level of the client and the client’s accountant. Often all three have a role in the due diligence.
There are multiple parts to due diligence. The accountant generally has a large role in financial due diligence and determining if the profitability that was represented by the seller is supported by the books and records and tax returns. The buyer has a role in the practical aspects of the business due diligence. For example, are the proper suppliers available at reasonable costs? The business transaction lawyer reviews business contacts, for example, if the business has tenants are the leases in good standing. For a business with tenants a Subordination Non-disturbance and Attornment (SNDA) agreement is frequently required by the attorney from the tenants to verify the terms of the lease and that the tenant will be staying. The due diligence is when the buyer does the investigation of the business to determine that the actual business is as the representations and to determine if there are any problems that will be a detriment to the buyer after the closing. This is known as the “paint or get off the ladder period”. If real estate is one of the assets of the business, the status of the title to that real estate, whether owned or leased, needs to be investigated usually by a title insurance commitment. If the business is in leased premises, the status of the lease also needs to be verified with the landlord and may indicate a term of the contract requiring a modification of the lease is a necessary condition. Frequently the buyer needs an extension of the lease term to make the acquisition feasible.
The business transactions lawyer , or the business transactions lawyer and the accountant, can prepare the due diligence lists of information to be given to the buyer and make suggestions of what the buyer needs to investigate. A good deal of due diligence is dependent on the experience of the buyer. If the buyer is already in the seller’s business, the due diligence may be less intense.
Usually, the end of the due diligence is also the end of the period during which the buyer can walk away and receive a return of any deposit that has been given. After the due diligence period, there is basically no reason for the buyer to refuse to close. Often a non-refundable deposit of a portion of the purchase price is required or increased after the due diligence period.
Purchase and Sale Agreements
One side prepares, and the other side reviews the purchase and sale agreement. The agreement includes the LOI terms and other specific terms and conditions that have been agreed upon and a number of terms and conditions that are common to most purchase and sale agreements called boilerplate. This contract may have to go back and forth a number of times and concessions made by both sides in order to finally get to an agreement both sides can live with. It is important that the client is advised of the changes that are being discussed by the business transactions attorneys. Some of those changes have practical implications, and some are what is required to accomplish something that has been agreed to by the buyer and seller.
Supporting Agreements and Documents
After the purchase and sale agreement has been signed there are a number of supporting agreements and documents that are required to complete the sale. Some are common in most purchase and sales, and some are specific for the business being purchased.
If the buyer is using a new entity to buy the business, that entity needs to be formed.
If the buyer is financing the purchase with a bank or investors, those commitments need to be in place before the end of the period during which the buyer can cancel the agreement, and the financing agreement and money need to be available at the closing of the purchase of the business. Frequently there is a loan closing and the closing of the acquisition on the same day.
Usually, the people who ran the business for the seller or a key employee have to agree that they will not compete with the buyer and the old business for a period of time. Both sides need legal help with that agreement.
Sometimes the principal of the seller or a key employee will be going to work for the buyer, and appropriate employment or independent contractor agreements are necessary. The buyer needs to know that those people are committed to the business.
If the transaction is a sale of the assets, the documents transferring the ownership of the assets to the buyer are necessary.
The foregoing is a sample of what is necessary if you are going to buy or sell a business. The business transactions lawyers at Battaglia, Ross, Dicus & McQuaid, P.A. are ready to help, contact us today for a free consultation.