Stepan, Lewis & Paxman, LC : Business Lawyers, Estate Planning, Real Estate and Litigation Attorneys in Sandy City, Salt Lake County, Utah

Stepan Lewis & Paxman: Sandy City Attorneys

Buying or Selling a Business

Many Potential Pitfalls for the Unwary

Buying or selling a business is a critical transaction in the life of the business owner. Buyers are concerned about many things, but might particularly be wondering "What am I really buying?" or "Is this business really what it appears to be?" Sellers also have many concerns, chief of which might be "Will the buyer be able to make his installment payments to me and what happens if he does not?"

Having a legal advisor that is experienced with buying and selling businesses will allow you to properly address the many and varied risks of this transaction. Having legal sales documents that are customized for your situation to address these risks will ease and guide many problems that may arise after the sale is complete.

What is the basic process?

Preparing for the deal. The first step is sometimes overlooked--preparation. If you're selling a business, this is a critical step. Are your corporate documents in order? Are your critical contracts with employees, suppliers, customers, landlords, and others ready for sale? Are your financial documents in order? Have you positioned the company for a strong selling price? Lawyers and other advisors, such as business brokers and investment bankers, can offer valable preparation advice and assistance. If you're planning to buy a business, preparation should not be under served. What are you looking for? Have you researched the industry?

Matching Buyer and Seller and Price. Finding a willing buyer and seller is the crux of the deal. Business brokers, investment bankers, and sometimes other advisors such as accountants and lawyers can help you find one another. People often ask us "what is a fair price for this business?" Our initial response is often: "Whatever the buyer is willing to pay and the seller is willing to accept. This is the basic economic fact, and we often lose sight of that fact when formulaic methods for valuing a business come into play, as they almost always do. Business brokers, investment bankers, valuation trained accountants and others experienced with business sales can give you specific advice on price.

Deciding Upon a Sale Structure. The structure of the sale is often decided before the buyer and seller are matched. In very simplified terms, there are two basic structures: (1) selling the assets of the business (aka "Asset Sale") and (2) selling ownership of the business entity (aka "Stock Sale"). For smaller businesses, asset sales are the most common.

In an asset sale, the seller's existing business entity (e.g. LLC or corporation) sells the assets of the business (e.g. equipment, inventory, the business name, rights under a lease, etc.) to the buyer. After the sale, the seller's entity continues to be owned by the Seller's owners, but the entity has no (or very few) assets.

In a stock sale, the seller's owners sell their ownership of the seller's existing business entity (e.g. stock of a corporation or membership interest of an LLC) to a new owner. After the sale, the seller's entity is now owned by the buyer. Asset sales are common in small transactions for several reasons, but a major reason is that, if properly documented, the Buyer does not take on the liability of the business prior to the closing. Whereas, in a stock sale, the buyer assumes the liabilities of the business from before and after the closing.

There are also important tax considerations when choosing a structure. Finally, a third type of structure is lurking: a merger in one of its many varieties.

Properly Documenting and Closing the Sale to Address Risk. When you buy or sell a car, you will sign a "Bill of Sale." The two basic purposes of the vehicle "Bill of Sale" are: (1) to legally acknowledge the car's new owner and the terms of the sale (such as price) and (2) to address risk by saying, as is common, that the vehicle is sold "As Is." When selling a business, the sales documents also serve those two basic functions: state the terms of the sale and address risk. However, both the terms of the deal and the provisions addressing risk are much more complex when selling a business than when selling a car.

The terms of the deal might include, for example: (a) An agreement to close the deal at a later date, after a period of time when certain things must occur, and (b) seller financing of a portion of the total purchase price with interest and other terms.

The contract provisions that address the risks that could arise after the closing of the sale often consume the majority of the ink in business sale documents. Businesses are almost never sold entirely "as is." Often, first-time business buyers and sellers will underestimate the need for extensive provisions addressing certain risks.

Risks to carefully address include, for example: (a) a buyer not making installment payments to the seller (This often involves a separate Security Agreement and UCC filings.), (b) the possibility that the buyer will become aware, after closing, that the seller did not disclose critical information about the business to the buyer during the sale process, and (c) obligating the seller not to start a competing business after the closing.

What is the basic message?

Selling a business is not like selling your car, even for small businesses. Experienced professional advice will help you avoid and deal with the many potential pitfalls.

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The material on this web site is for general information only and does not contain a full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The viewing of this web site and the material contained herein does not create an attorney-client relationship with this Law Firm. Gregg K. Stepan is admitted to practice law in Utah and the District of Columbia. Christopher F. Lewis, Isaac D. Paxman, Richard N. Barnes, and Jonathan D. Bletzacker are admitted to practice law in Utah.