Preface
It seems surprising to buy and sell small businesses, but the process can be understood and utilized to help sharp entrepreneurs manage the time, direction, strategy of business professionals and other experts who will help the process There is the logic. This article gives an overview of what is necessary for intelligent and effective cooperation with experts in the sale and purchase of small and medium enterprises.
Three types of small business sales
Small businesses can be sold by selling assets, selling stocks, or merging, and asset sales are ordinary vehicles of choice for many SMEs.
Business Sale - Canned and Customized
The sale of small businesses may be done through brokers through essentially managed processes. In that case, buyers and sellers will get a homogenized process, regardless of whether they meet legal needs or not. Documentation is "standard", but contract terms are not customized for the parties. Such documents cover minimal conditions, but few others.
It is far superior with very small sales, but using a custom transaction document prepared and reviewed by a qualified business attorney. Normally, the seller gets legal and accounting advice on how to build a sale, and in collaboration with future buyers, you can get the basics of the contract. The term sheet is not legally binding, but it provides a useful framework for moving forward. Of course the parties can skip to a formal contract.
Business sale - purchase agreement
An official contract is a purchase contract. Normally, contracts or promises (such as "I will sell to you and purchase x assets or x stocks", etc.), warranties and representations ("As a seller, I am selling you, there is no law that conflicts with it ), A termination condition (for example, only when the x, y, z conditions are satisfied, for example, the landlord agrees to assign the lease).
Escrow process, due diligence, and confidentiality agreement
The contract is signed and escrow is established as a mechanism that usually leads to closure where the sale is completed. Procedurally, such an escrow is very similar to what was set up when you sold a house, but instead of waiting for (for example) the result of title search, licensing approval for alcoholic beverages and business sale .
Due diligence is an important part of this process, mainly on the side of the buyer. This is the process of examining the books and records of the business to which the buyer is sold and taking other measures to ensure that what is being sold is genuine and worthworthy. Lawyers and accountants usually support this process.
Detailed due diligence can be done before or after an official contract signature. You can also make limited due diligence in stages before signing expiration with detailed due diligence during the escrow period. Buyer satisfaction with due diligence is often a condition of termination.
Due due diligence is not normally allowed until the buyer signs a non-disclosure agreement.
Common traps and pitfalls in trading small business
There are many possibilities that many traps and pitfalls will come on sale. Buyers may claim to purchase business while planning to access important information that is actually used competitively against the seller. Confidentiality Agreement will help here, but this may give the seller involved in the case a cold consolation. I understand in this field.
A serious seller 's risk is to take care - of - protection loans that are insufficiently protected. In default case, proper collateral (such as UCC) is usually important to handle this.
Buyers are usually faced with greater risk. Immoral sellers can play all kinds of skills to make fraudulent sales. The nature and extent of the tricks used, or even erroneously made mistakes, are vast and diverse. This is often the main focus of lawyers and CPAs in dealing with due diligence, forming vouchers' representations and warranties.
From the buyer 's point of view, the structure of the transaction may affect the risk of liabilities. In the sale of shares, the buyer will inherit the entire history of good and bad companies, along with the purchase. In asset sales, buyers can restrict inherited responsibility risk by assuming that they are not generally overall.
Most businesses are sold at a premium based on good will, generally maintaining the value of continuous concern, with specific customer base, recognizable name etc etc. Most buyers will desire non-competitive contracts from the seller, or at least non-settlement contracts on existing customers, if the seller does not inform them.
Please pay particular attention to selling of pain. Unless it is relieved from complaints sale or bankruptcy due to UCC's mortgage execution, even if the acquirer does not assume liabilities, there is a possibility of inheriting all or part of that obligation. Taking risk into account, sales of pain are generally radioactive for buyers.
Common business tax problem
Another big problem is taxes. Selling stocks has tax revenues that are very different from asset sales, and some are advantageous to sellers and other buyers.
For example, if the seller is a company C with a low basic asset, selling a considerable amount of assets is likely to lead to a serious risk of double taxation. Let's say that corporate seller ABC Corp. sells business by $ 10 million by selling assets and has almost zero basis on that asset. This can happen, for example, when a manufacturing business with fully depreciable assets is sold. Usually, the sale creates taxable capital gains on corporations. However, considering that this is company C, the company's cash is usually taxed again as a dividend when it is distributed to shareholders.
In the same scenario, shareholders of ABC Corp. will sell 100% of the corporate stock to buyers, the shareholders will pay tax once for capital profit.
Such tax matters need to be complicated and handled with the help of experienced professionals Excellent business lawyers can propose an approach that can mitigate double taxation problems. The point here is not to try to cope with any situation, but to explain how taxes have a serious impact on income depending on the structure of sales.
Likewise, in asset sales, purchase prices need to be allocated to assets to be sold, and different income and sales tax treatments are made depending on the nature of the assets sold and the nature of the allocation. Such allocation should be done with the help of a qualified attorney or CPA.
Please do not ignore the tax side of business sale. It may be the most important part of a transaction, but it is almost always important in important respects. For more sophisticated transactions, tax exemptions are also carried out by reorganization.
Estimated transaction cost
How is the transaction cost? These can literally go to the board in full. For typical small business sales, buyers need to use approximate total transaction costs with a 2% to 5% rule of purchase price. This is the amount spent on attorneys, accountants, other experts, escrow charges and so on. It is important when broker fees are involved or when transactions are complicated, but the seller's expenses are usually lower. In any case, instead of strictly relying on empirical rules, please use it for the initial plan and consult with experts to improve the estimate.
Work with qualified business lawyers
This highlights some important issues related to the sale of small businesses, but does not mention legal implications or implementation methods (please consult a lawyer). It does not mention important issues such as consent and approval (landlord, agency, supplier, spouse, etc.), use of fair opinion, attorney's opinion, no-store contract, holdback provision etc. There are lots of nuances that only those knowledgeable lawyers pick up these transactions in order to solve problems such as mass selling compliance, compensation, co-liabilities and multi-liability obligations.
For your specific transaction, please get a good business attorney. It is not prudent to keep costs down in complex areas with high stakes. In case of problems, things saved today are sent many times to dig up from confusion many times. Therefore, budget what you need and do it correctly.
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