Guess what, it really matters to have a great attorney when you are selling your business.  Let me explain.

I wrote before about my involvement in typical buying/selling business transactions; it’s an old post, but it has not changed, see “Buying a New York Business”.  As you can see from that post, the legal documentation required for a business sale can be substantial.  It is crucial that it all fits together and there are no inconsistencies or careless mistakes.

There is the Asset Purchase Agreement, or the Stock Purchase Agreement (depending on the structure of the sale), numerous exhibits to those agreements, promissory notes, security agreements (to secure the installment purchase price), guaranties, bills of sale, consulting agreements (if seller stays on for some time) and others.  These documents can be many pages long.

I have seen many parties gloss over the details (including attorneys), not think through all the worst case scenarios and not be concerned with precision.  This can be very costly.  More than once, I have dealt with business transactions (where I was not the attorney) where a little more attention could have saved the seller of the business hundreds of thousands in legal fees.  The situation is usually as follows:

The sale of the business closes.  Buyer may or may not have bought a great business.  For some reason, the business does not do as well as hoped or the buyer has buyer’s remorse for any number of other reasons.  What will the buyer do?  March into his lawyer’s office and ask “how can I get out of this?”  And the lawyer will go through the agreements and documents with a fine tooth comb to find any loophole he can use to renegotiate the deal or even sue.   When there are three or more agreements that need to fit together and be consistent it is not that difficult to find something….if….a careless attorney represented the seller in the first place.

For example, the careless attorney could have drafted a broad and imprecise definition of the assets being sold.  You may think, how is that possible?  It is, especially when the assets are not that easy to identify, which is the case with certain intellectual property.  Are we selling the entire IP or only parts of it, what parts? Are we giving a license to what we are not selling?  Then if there are numerous provisions relying on that first definition, in numerous documents, you can get dizzy very fast.  The attorney who has anything less than a laser focus on these issues will make mistakes.  Anything that has to be clearly defined, narrowed or specified is a potential problem.

Another pet peeve of mine is the rushed closing. The closing is the last step in the selling process.  The parties and their 
attorneys get together to exchange money and property and take care of
all the remaining paperwork.   Often in the middle of a closing, the opposing attorney wants to make changes and says “let’s just throw it into a side letter” and then they start dictating to their secretary.  This is a minefield for mistakes and oversights.  I know people want to get stuff done and move on, but you may pay the price later.  I like to go into the closing prepared for any such scenarios and not have to make last minute rushed changes.

Lawyers get trained and paid to be a little paranoid. They have to foresee the worst case scenario, in the interest of the client.   If they are good at that, they are providing a great service to the client.  Of course this has its limits.  The lawyer’s paranoia cannot be so profound that it gets in the way of making the deal happen.  Great lawyers know how to strike a balance.

Finally, somewhat unrelated, the folks over at Biz Buy/Sell have an incredible resource for the business seller.  A whole free book explaining the process of selling your business.  I read it over again recently and highly recommend it when you are starting the process of selling your business.  But since their SEO is probably better than mine, you may have already found it.

You’ve got homework to do before you can successfully sell your small business.  Even if you already have an interested buyer, attention to the details at this stage of the game will help you in the long run and protect you from unexpected snafus.  Your small business lawyer should be able to help you with these steps.

1.   If you’re leasing space for your business, find out from the landlord of the premises (and check your lease) what he/she requires in order to consent to an assignment of your lease to the buyer.  Usually the Landlord wants to see that the proposed buyer is credit worthy and has a good chance to continue your business successfully and consequently be able to pay his rent;

2.   Make sure you have a copy of your lease and all its extensions and modifications.  Check the requirements in the lease regarding the assignment of the lease to a buyer of the business.  If you’re lucky the lease “only” states “any assignment of this lease requires the consent of the Landlord, which consent may not be unreasonably withheld.”  This tells you that your landlord has to give your proposed buyer serious consideration.

3.   If you’re not of the super organized type, do a lien search on your business (the business owners) and its assets in order to find out if there are any forgotten liens outstanding.  You may have forgotten about some age old tax lien, equipment lien and so forth.  If you find liens, pay them off or disclose them to the buyer and arrange for pay off letters with the creditors.  Pay off letters provide for the payoff of debts at closing and guarantee the buyer that the creditor will release you, the seller, upon payment of the debt.  If the payoff occurs at the closing, the funds could come from the proceeds of the selling price.  Neglecting to disclose outstanding debts could make you liable for a breach of the representations and warranties in your sales agreement.

4.   Make a list of all relationships with vendors, service providers, large customers.   To the extent you have ongoing contracts with any vendors, service providers or customers, assemble all those contracts.  Read (or have your small business lawyer review) all these contracts to determine what happens to them in the case of a sale of the business.

5.   Make a list of all assets of the business and determine their initial cost and depreciation status (or have your accountant do it).  Have you accountant or small business lawyer advise you on the tax consequences of a sale of the business and how to best allocate any purchase price to various asset groups.  Get your financial statements in order and ready to be presented to the prospective buyer.

6.   Clean up your business, literally.   A little staging and polishing goes a long way to increase your selling prospects;

7.  If you have staff, determine all your operation procedures and manuals and other ways of doing business smoothly and day to day.  The more you can show that your business is not that dependent on you, the prior owner, the better it is for a prospective buyer of your business.  A “turn-key” business is what you’re going for.

8.  Get all your permits and licenses together and in order, determine if the licenses are assignable or if the new buyer has to get new licenses and permits;

9.   Get emotionally ready to let your business go!  Not sure what that would entail for you, but I think an overly attached business owner doesn’t make a good business seller.

 

 

It is rare that a business in New York owns the property from which it operates.  Most businesses rent commercial space for their store/restaurant/warehouse or other venture.  Thus, the owners of the business will be party to a lease with the owner of the building that houses the business.  This lease becomes an important piece in the puzzle that is the process of selling/buying a business in New York.

When it comes to selling or buying a business that has a lease, the lease becomes an important part of the selling/buying process.  The buyer should carefully check the lease terms to not only determine the rent and the remaining term of the lease, but also whether the lease can be assigned.  What does that mean?  If the buyer wants to buy the business, the buyer should be able to step almost entirely into the shoes of the prior business owner, including the right to occupy the business premises.  In order to do that, the buyer has to take over the existing lease for the premises or make sure that the landlord of the premises is willing to give him/her a new lease.  If the buyer plans to take over the existing lease, he/she has to make sure that the current lease allows an assignment of the lease to a buyer of the business or if not, that he/she gets the approval of the landlord to take over the lease.

Leases vary greatly in what they state regarding the assignability of the lease.  Some state “this lease can not be assigned without the express consent of the landlord” or “this lease can not be assigned without the express consent of the landlord, which consent may not be unreasonably withheld.”  Others may spell out specific requirements for a potential new tenant before a landlord even considers an assignment of the lease.  There may be additional security deposit requirements or even fees for the landlord for allowing another tenant to take over the lease.

In most cases it becomes necessary for the buyer to prepare an application and submit it to the landlord.  With the application, the landlord will determine whether the proposed buyer is creditworthy and has the financial resources to carry on the business and pay the rent on the lease.  If the lease does not have the aforementioned clause “which approval may not be unreasonably withheld”, the landlord has wide discretion to turn down the buyer and thereby cancel the deal.  No buyer would want to buy a business without having the approval of the landlord to take over the lease.

Buying a New York business involves many steps, legal considerations and documents.   I think almost anyone would be well advised to seek the help of a New York business attorney to make the purchase successful and legally sound.  This post is designed to give you an overview of my usual involvement in the process of buying a New York business.

At the time I am being approached to help with the legal aspects of buying a New York business, a potential client usually already has a particular business in mind and has an idea of its value.  (The process of finding and valuing a potential business target is a post in itself and I won’t address it here)

My first task is to make sure that the client understands what steps are involved in the purchase of a New York business, what investigations are required and what risks and problems may lay ahead.

INVESTIGATION OF THE BUSINESS (“DUE DILIGENCE”)

First, the client has to thoroughly investigate the New York business.  I am not usually involved in the actual investigation and inspection of the business, but I will guide the client with respect to what he/she should look for and explain the significance of the client’s findings.  I will review all agreements, leases and other contracts.

If problems are discovered in the course of the investigation, I am there to help the client overcome such roadblocks. For example, if the client finds that there are liens on the assets of the business, I might consider incorporating a provision into the sales agreement that requires the seller to pay off such liens on or before closing of the transaction.  Similarly, if an agreement to be transferred to the buyer (for example the lease of the business)  requires a consent from a third party, I’ll make sure that the sale is conditioned upon receipt of such consent.

My laundry list of things to ask from the Seller:

  • a.  Tax Returns
  • b.  Financial Statements
  • c.  Leases
  • d. Contracts with vendors, suppliers, licenses, distributor agreements, insurances, equipment leases, and so forth
  • e. Corporate Documents (or LLC Documents) if the business is owned by a corporate entity
  • f. A list of the Licenses and Permits maintained by the business or its owners  (I will determine if other licenses are necessary and whether the existing ones can be transferred or new ones have to be obtained)
  • g.  A list of all the assets of the business, such as equipment, inventory, intellectual property
  • h. UCC Liens/Tax liens/Business Credit Report (I will conduct independent research into these matters)
  • i. A list of all the Employees of the business

STRUCTURE

At some point I will confer with the client about the desired structure of the purchase of the New York business.  The structure of a business purchase has important consequences for the potential liabilities of the buyer and his/her tax bill resulting from the purchase.  On occasion, I will cooperate with the client’s existing accountant to fully investigate and analyze all issues involved.

By way of background:   If the business target is a limited liability company (LLC) or corporation, the client has two options in structuring the purchase. He/she can purchase all of the assets of the business piece by piece (Asset Sale) or purchase the entire corporate entity that owns the business (Stock Sale).

FORMATION OF ENTITY

It is often a good idea for the buyer to form a new entity, specifically for the purpose of buying and operating the to be purchased business.  If the buyer decides to do so, I will usually handle the formation and all issues surrounding the formation of such new entity.

TERM SHEET

Often, Seller and Buyer wish to document the rough terms of the proposed transaction in a  “term sheet” (also known as a “letter of intent” or a
“memorandum of understanding”). The term sheet is rarely longer than a
page or two, and should expressly state that it is non-binding on both
parties.  I may draft a term sheet or comment on one that has been provided by the Seller.


SALE AGREEMENTS AND OTHER SALE DOCUMENTATION

After a term sheet is signed (if there is one) and the client’s investigation of the business is almost completed, I
 will draft and/or review a number of agreements and
documents that are instrumental in the transfer of the business to the client, or to the entity formed for this purpose.

The most important document in a business sale is the “purchase 
agreement” (also known as the “sales agreement” or “acquisition
 agreement”). Often, the seller’s attorney will prepare the first draft 
of this document. Unfortunately, that doesn’t always mean that I will have less work to do. If the seller’s attorney is inexperienced 
or just plain unreasonable, the review of a bad or one-sided agreement might take more time than preparing it in the first place.

I may also prepare a “closing checklist,” which is a
 list of all of the documents and agreements that need to be drafted and
executed, and of all actions that need to occur on or before the
closing of the sale.

In drafting a purchase agreement and other documentation for the buyer, I will make sure that the term sheet is accurately reflected, that the buyer is properly protected from misrepresentations of the seller and from prior liabilities of the business.  If desired, I may draft provisions that provide for continued assistance of the old business owners for a period of time, provisions that prevent the old owners from competing with the buyer after the closing and any other specific terms of the deal.

Other documents usually required to be drafted are:  promissory notes (if the buyer purchases in installments), security agreements (if the buyer gives security for the outstanding purchase price in installment sale), guaranties by the buyer personally, financing documents, a bill of sale to transfer assets….and so forth, no deal is really like the other

CLOSING

The closing is the last step in the purchase process.  The parties and their 
attorneys get together to exchange money and property and take care of
all remaining paperwork.   I make sure that every document is exchanged and properly executed.

Some closings are uneventful. Others can 
include last-minute negotiation of agreement terms, waivers of 
representations, temper tantrums, and so forth.
  If all documents are in final versions prior to  the closings, the parties may agree to exchange signature pages over email, wire the necessary funds, and conclude the closing over the phone.

WHAT DOES IT ALL COST?

I like to charge flat fees for my help in a New York business purchase.  However, no deal is alike and I usually first talk to a potential client to assess the likely work involved.

I’ve pretty much had given up exercise for blogging.  But since I figured out a way to take blogging to the gym, I’ve been back.  I make it bearable by listening to podcasts, the audio version of blogs.  Today I listened to (and recommend):

Preparing you Businesss for Sale – An interview with Mathew Ashburn hosted by Rush Nigut

Starting your Internet Business LCC on Internet Business Mastery (part one of two)

See Part 1 here; Part 2 here; Part 3 here; Part 4 here; Part 5 here;

Finally, the day of the closing on your small business purchase has arrived. The parties and their attorneys come together for the final handshake on the deal. All of the remaining agreements are executed, documents are exchanged, and money changes hands.

Usually, the sales agreement sets forth when and where the closing is to occur; often this happens at the seller’s attorney’s office.

In addition to the purchase price, there may be a final adjustment of operating expenses, in which the seller is reimbursed for certain expenses that ultimately benefit the buyer. For example, the seller may have paid a certain bill for the entire month at the beginning of the month, while the buyer begins reaping the benefits of the payment upon closing in the middle of the month.

When executing agreements and documents, it is best to ask for duplicate sets of originals, so that you and the seller each have an original set of documents.

The best closings are uneventful, thanks to good preparation and the cooperation of all parties. At times, however, there may be some negotiations about last-minute changes to the documents, or there may be waivers concerning certain closing conditions that could not be met, but the parties are willing to go ahead with the deal anyway.

It is important that your attorney is fully aware of all aspects of the transaction, because last-minute changes and adjustments to a business purchase require quick thinking, sound risk assessment, and good judgment. Similarly, you should be familiar with the transaction in order to make informed decisions about the business deal. While you should rely on your attorney, it is ultimately your deal and your business at stake.

If you need help with buying or selling a business in New York, contact a licensed small business attorney in your area.

Httpwwwflickrcomphotospedrosimoes7129049See Part 1 here; Part 2 here; Part 3 here; Part 4 here; Part 5 here;

The purchase of a small business requires many legal agreements and documents to effect the transaction.  Obviously, you need an experienced attorney to draft and/or review all of these documents and explain their significance to you.

While you were the one to negotiate and reach an agreement on the business terms with the seller, it is your attorney’s job to document such a deal. In addition, he or she should advise you of legal issues and devise agreement provisions that protect you from any problems that may have surfaced during the due diligence and negotiation processes.

I am sure that you have heard the notion that attorneys can be deal-breakers. While attorneys have to be cautious and warn you of pitfalls in the transaction – which is why you might perceive them as deal-breakers – they should not advise you on the purely business issues of the transaction. A good attorney advises you about potential risks and gives you strategies to minimize those risks, but allows you to go forward with the transaction if that is the informed decision you have made.

What are the documents likely to be encountered in a typical small business asset purchase?

Read more

Files_by_juan23for(See Part 1 here; Part 2 here; Part 3 here; Part 4 here; Part 5 here;)

Due diligence is the process of investigating the business you are planning to buy inside and out;  lots of files to look at, numbers to crunch and agreements to review.  You want to know that the price you are paying for the business is fair, and that there are no hidden secrets about the business that could haunt you after you become its owner.

Here is a list of the most common issues for investigation when doing due diligence for a small business purchase:

Read more

See Part 1 here; Part 2 here; Part 3 here; Part 4 here; Part 5 here;

Once you have found a business that seems like a worthwhile acquisition (a “target”), you are ready to negotiate the terms of the transaction.  But what are the typical terms of a small business purchase?  What is there to consider? In other words, what are you in for?

Enter:  the “term sheet,” also known as a “letter of intent” or “memorandum of understanding.”

Read more

See Part 1 here; Part 2 here; Part 3 here; Part 4 here; Part 5 here;

This is the first in a series of five posts working through the process of buying a small business in New York.

This series will focus on the legal aspects of such a transaction and an attorney’s contribution to a successful business purchase.

Let’s start with an overview of the usual sequence of events when buying a business. Obviously, the first step is to find a business worth buying.

Read more