Buying a business is exciting, but it can be very overwhelming. Sometimes, people are so stoked their human brains “see only what they want to see”, and they forget to take care of some basic things…like taking the time to fully understand the agreement, for instance!
Your brain sees only what it wants to see.
Here is something you should know about human brains. People want what they want because of how they think they will feel once they have it. So, if you are thinking “this business will thrive under my leadership” or “what a goldmine!” or even, “this will be such a great change in my life” chances are, your brain will find evidence for only those thoughts! This is why you need a neutral, seasoned attorney to help you understand the deal and to do the due diligence necessary to make sure the deal is as good as you want to believe it is.
Two ways the deal can be structured – asset purchase or stock purchase.
In an asset purchase, the purchaser only acquires the assets and liabilities it identifies and agrees to acquire and assume from the seller. In a stock purchase, the purchaser acquires the target company’s outstanding stock (typically all of it) and as a matter of law, acquires all of the company’s assets, rights, and liabilities (including undisclosed or unknown liabilities).
Asset purchase – Purchasers prefer asset purchases over stock purchases because the purchaser have flexibility to cherry pick specific assets and liabilities it wants. Also, with an asset purchase, the risk of assuming undisclosed or unknown liabilities is far less. Finally, an asset purchase is a generally a tax friendlier method for the purchaser. I won’t go into it, but the purchaser receives a cost basis in the acquired assets. This means the purchaser’s basis in the acquired assets equals the purchase price paid plus assumed liabilities and other items.
Stock purchase – Sellers generally prefer this method. Generally, stock purchases are more straightforward. But, because individual assets and liabilities are not being individually purchased, there is a greater risk for a buyer that certain liabilities may be unknown or misunderstood. Stock purchases are generally tax friendly for the sellers because the transaction results in a single, stockholder level, taxation as opposed to potential double taxation, at both the entity and shareholder levels, in an asset purchase.
Due Diligence – Here’s a checklist of what you need to consider and research before you buy a business.
- Evaluate the financials. Look at the books. Hire an accountant, I’ll repeat, hire an accountant to help you evaluate key financial indicators such as sales, profits, debt, expenses, and cash flow.
- Entity status – Confirm the businesses entity status and review the company records and governing documents, such as operating agreement or bylaws, resolutions, minutes, etc.
- Understand the Ops. – get a grasp on how the business is operating now. Take a look at working capital.
- Understand the outlook for the business and industry – take a look at market outlook, trends, the company’s client base, the company’s competitive advantage.
- Understand what assets are involved – yes, basic, but understand, what, exactly, you are getting out of the deal. Consider any intellectual property – trademarks – and identify how that is captured and protected.
- The company’s reputation!
- Verify licenses and permits – this is often overlooked, but if certain licenses are not up to date, you will incur the expense of updating them and, worst case, your business may be interrupted while you scramble around updating licenses.
Ok, friends, there is a lot involved in buying or selling a business. Make sure you do it the right way and get yourself a team of experts to guide you. Contact Wick Law for more information, we love heling clients navigate this stuff!!
Wick Law, LLC is a small business legal practice, representing owners, investors, and entrepreneurs in all aspects of commercial, corporate, and business law, contracts and negotiations, and business litigation. For more information: Contact 614-572-6366, visit www.mwicklaw.com, or email us at firstname.lastname@example.org. Wick Law, LLC is located in Columbus, Ohio.
(Materials in this article have been prepared by Wick Law, LLC for general informational purposes only. This list is for educational purposes and is not to be considered exhaustive. More items could be added to this checklist based upon the type of transaction or industry standards. These materials do not, and are not intended to, constitute legal advice. The information provided is not privileged and does not create an attorney-client relationship with Wick Law, LLC or any of the firm’s lawyers. This checklist is not an offer to represent you. You should not act, or refrain from acting, based upon any information in this checklist. Wick Law, LLC maintains offices in Columbus, Ohio, and has lawyers licensed to practice in Ohio and in the United States District Court, Southern District of Ohio. The firm does not intend to practice law in any jurisdiction where the firm is not licensed.)