What issues should I be aware of when buying or selling a business?
Whether you are buying or selling a business, some mistakes to avoid are:
- Not reading the contract thoroughly or not understanding it completely.
- Not doing your due diligence. Buyers and sellers have investigations to conduct.
- Not having an attorney and a CPA to look out for you and to help mitigate risks.
- Not advocating for yourself during negotiations or having a “just get it done” attitude.
Without an attorney, these pitfalls can be easy to fall into because it’s human nature. That’s why its so essential to have an attorney involved to guide you, support you, educate you and be a buffer, if necessary. You don’t want anything to slip through the cracks. You want to know what you’re getting into.
What’s the difference between an asset sale and a stock sale?
In an asset sale, the seller will sell the “insides” (assets) of the business but not the “container” (corporation or LLC) itself. The assets transfer into a container owned by the buyer. The “Seller” is not a human, but rather it’s the corporation or LLC that is selling its assets. Similarly, the “Buyer” is not a human, but a different corporation or LLC that is receiving the assets.
In a stock sale (for a corporation) or an interest sale (LLC), the buyer is purchasing the seller’s “container” (corporation or LLC) and everything inside of it. The “Seller” is the human or humans that own the container. The “Buyer” is the human or humans that will become the owner(s) of the container. The container stays the same, regardless of who owns it. That can be good for consistency, but there can also be more risks with this type of sale. Sometimes, given the circumstances this is the only way to transfer a business.
It’s important to determine which type of sale from the beginning, since the agreements and documents are different for each type.
What are the stages of a purchase/sale?
Deals can take all shapes, but generally speaking there are four stages to purchase and sale of a business. First, the letter of intent or term sheet is exchanged to make sure the buyer and seller are in agreement of the basic terms. Second (or Third), a Purchase agreement is drafted to document all the details and make sure everything is covered. Third (or Second), due diligence is conducted by the buyer to learn more about the business and see how it works – and also during this time, the buyer and seller start working together to plan for the practical realities of transitioning the ownership. Last, at closing everyone sits down and signs the paperwork to actually transfer title and ownership of the business to the buyer.