Buying or Selling a Business?
by Stan Johnston
One of the most daunting tasks facing any closely-held business owner is when he/she decides either to acquire or sell an existing business.
An acquisition can result in a disaster for the
purchaser if not properly documented to protect the purchaser from numerous legal traps. Conversely, a seller can end up with much less after-tax proceeds unless proper planning and negotiations occur.
The first step in ensuring a successful result to an acquisition/disposition of a business is to engage in proactive planning. It is extremely important for a seller to position and prepare the business so that it will be more attractive to potential buyers. Just like a homeowner should spruce-up and repair a residence before it goes on the market, a business owner needs to “fix-up” numerous aspects of the business including:
• Cleaning up financial statements;
• Documenting existing contractual arrangements with customers and suppliers;
• Ensuring that all employees have appropriate
confidentiality and non-compete agreements;
• Checking that all licenses, permits and registrations are current;
• Updating and protecting all intellectual property and trade secrets;
• Attempting to resolve any outstanding litigation and disputes.
A buyer should preplan an acquisition by setting forth goals for a proposed acquisition, clearly delineating roles and duties for each of buyer’s employees that will be involved in the acquisition, getting pre-approval from lenders or financing sources, and developing a checklist for issues and actions concerning the integration of the purchased business.
Once a business owner decides to sell a business, a confidentiality/non-disclosure agreement (“NDA”) should be signed between the seller and any proposed purchaser before any documents or information is shared. Often a NDA is signed before a proposed purchaser even learns the identity of the seller. It is important to remember that when dealing with a proposed transaction between competitors, or between a company and a supplier or customer, having a NDA may not fully protect a seller because once a competitor or potentially adverse party learns confidential information about the company, it is hard to “un-learn” information and harder to prove that the recipient of the information improperly used it in violation of the NDA. Accordingly, a seller should withhold key confidential information which, if disclosed to a competitor, would put it at a competitive disadvantage until it is clear that the transaction will actually close. This is a delicate balancing act with the purchaser’s desire to know details before closing and the seller’s reluctance to disclose information while the competitor has outs to walk away from the deal.
The due diligence phase of an acquisition principally entails the purchaser reviewing the business’s books and records, operations and personnel. The seller will often perform due diligence on the purchaser, especially on its ability to fund the purchase price, and how the purchaser will treat the business and the employees after closing.
Once the parties have reached a basic understanding of the terms of the transaction, the next step is to document the deal. Often the first step is a Letter of Intent (“LOI”), which is a non-binding memorandum of understanding but which may contain binding provisions such as no-stop or exclusivity clauses. Sometimes, the parties bypass a LOI and go straight to a definitive agreement (either signed before or at the closing). If a LOI is to be prepared, the seller should spell out as much of the transaction’s terms as possible, because often the purchaser has much more leverage to negotiate down the purchase price and dictate terms if due diligence discovers problems and the seller’s employees, customers and suppliers know that the purchaser is negotiating to acquire the business. Buyers usually want to acquire the assets of a business rather than the stock/equity interest of the company so as to limit the liabilities that will be the responsibility of the buyer after closing. However, a buyer should be aware that even in an asset sale, a buyer may be liable (i) as a successor employer in some circumstances (which means that the employees could sue the buyer for back wages and claims that were owed by the seller), (ii) for sales taxes as a successor-in-interest under state and local law, and (iii) for all debts of the seller under a de-facto merger argument (usually reserved to related party transactions).
Often, significant issues are discovered and resolved right before closing or at the closing table. A business owner must be prepared for that contingency and must have representatives at the closing with the authority to negotiate and resolve all issues. If a business owner understands the acquisition/disposition process and has prepared for the transaction in a diligent manner, and there exists mutual trust between the parties, the transaction can be a smooth and cost-efficient process.
Stan Johnston is member and chairperson of the Business Tax and Estate Planning Department at Lewis, Rice & Fingersh, L.C.
P | 816.421.2500
E | scjohnston@lrf-kc.com