The sale of a business is an intricate process involving a variety of issues including corporation and business entity law, taxation, securities regulation, antitrust, labor, and employment law. The team of Rhode Island business lawyers and corporate attorneys at Palumbo Law offer a wide range of legal services for clients considering selling their businesses.
The Decision for Your Business Sale
Prospective sellers and purchasers have their own reasons for entering into a sale or business transaction. Along with maximizing the sales price and ensuring that the price will be paid, sellers want to limit the taxes on the sale proceeds. While the primary motive may involve the financial appeal of the sale, other considerations may be present, such as the survival of the business and the protection of its good name and employees who stay on. Another concern is the effect of the sale on the seller’s continuing exposure to the liabilities of the business.
It is important to consider the extent to which the seller’s continued involvement in the business will be needed in order to make the transition a success. There are a host of reasons why a purchaser may be looking to acquire a new business or expand an existing business. Knowing the prospective purchaser’s reasons for buying a business will not only give the seller the opportunity to determine the likelihood that an acquisition can ultimately be completed and whether the buyer is the right match, but it may also suggest the form that the transaction should take.
Structuring Your Business Sale
Transferring ownership of a business may be accomplished by either selling its assets or selling equity interests in an entity that owns the business. The transaction may also take the form of a merger. Each method has its own advantages and disadvantages for both buyer and seller:
Structuring the transaction as an asset sale means that the purchaser acquires some or all of the assets of the business being sold and may assume liabilities of the business. Purchasers often favor this method over a share sale agreement because only the desired assets of the business can be purchased and, as a general rule, the purchaser becomes responsible only for the liabilities of the seller that are known and specifically assumed. An asset sale is often more appealing to the purchaser for tax reasons as well. The seller on the other hand might resist an asset sale because the seller could be left with unsalable assets and may continue to be responsible for the liabilities of the business.
Asset purchase agreements typically address inventory, accounts payable and receivables, and issues surrounding the condition of assets. The mechanics generally entail:
- Conveying title to each asset be sold to the purchaser
- Transferring assets such as franchises, contracts, and leases
- Renewing licenses, permits, and qualifications to operate the business
- Getting approval of shareholders or equity owners if the sale involves a substantial portion of the selling entity’s assets
- Transfer or sales taxes may be incurred
In a sale of stock, the purchaser acquires an equity interest in the entity that owns the business being sold. The mechanics are much simpler than those of an asset purchase agreement. A single form of the document may be all that is needed to transfer the interests being sold, and because the entity will still exist the sale may not be considered a transfer under franchises and other arrangements. Transfer taxes are not incurred, and the attributes of the entity remain in place. Equity owner approval is not typically required in the absence of a buy-sell agreement. The entity will retain its assets and remains responsible for its obligations, so the purchaser cannot pick and choose among them.
A business operated by an entity can be acquired by another entity in a merger. The acquiring entity takes over the assets of the target entity and becomes responsible for its liability. The target entity will cease to exist and its equity owners obtain interests in the acquiring entity. Merging a business with another may be tax-free for both sides, but the fact that the parties will continue as owners of the same business often makes this alternative undesirable.
What to Expect When Selling Business
A business is a complex asset with numerous parts and unique attributes. The seller should anticipate that the purchaser will insist on carrying out a thorough due diligence review before committing to buy the business. But the seller should in turn investigate the purchaser’s ability to pay the price for the business by focusing on the purchaser’s financial statements. If the seller hopes to maintain the existence of the business, protect its good name or take care of key employees, the seller may have to expand its investigation into how the purchaser operates its existing business and consider the reputation and integrity of the purchaser.
Sellers sometimes have emotional ties to their business that make the process of negotiating and completing the sale difficult even if there are good reasons to sell. Between finding a buyer, negotiating an appropriate price and payment terms, performing due diligence, deciding the method of transferring ownership, drafting the necessary paperwork, and following through to closing, selling a business is a complicated process.
Choose Palumbo Law
Contact our Rhode Island corporate law firm and business attorneys today to discuss your plan for selling a business. We are ready to guide you through all facets of the sale of your business.