Buying or Selling a Business – Have You Done Your Homework?

Buying or selling a business can be a very exciting time for both the buyer and seller.  As a buyer, you may be starting a brand new venture or growing your existing business.  As the seller, you may be moving on to new and different projects or life experiences.  Either way, this transaction involves much more than just agreeing on the purchase price.

The first question is to define what you are truly buying or selling.  Will only certain assets of the business be transferred from the seller to the buyer?  Or will there be a transfer of all of the membership interests of an LLC, or all of the shares of stock of a corporation?

Asset Sale

Assets of a company can include not only equipment and inventory, but also client lists, intellectual property, accounts receivable, goodwill, and current contracts if they are assignable to a new owner.  The sale will include whatever elements the buyer and seller agree upon and negotiate into the price.  The company itself, however, is not sold, even if it is left with no assets after the sale completes.

Membership Interest or Stock Sale

Transferring the ownership of a company – whether that takes the form of membership interests or shares of stock – means that everything about the entity transfers.  This includes the assets listed above, but also the entity’s name, tax and legal history, business credit score, liabilities, employment contracts, and other tangible and intangible elements.

Do your Homework

When buying all or part of a business, it’s important to do your research – to make sure that you are buying what you think you are buying.  The due diligence process is intended to ensure that there are no surprises that show up after the sale has concluded, because that will likely cause time, effort and expense that the buyer did not anticipate.  Information disclosed by the seller should include:

  • Corporate structure
  • Financial and tax information
  • Business matters, contracts, and leases
  • Employment and compensation matters
  • Regulatory and environmental compliance
  • Equipment, inventory and intellectual property
  • Litigation and legal matters

On the buyer’s part, certain representations and warranties should be made regarding the buyer’s ability to finance the purchase and to competently run the business after the sale.

Non-Compete Agreement

A seller of a business generally has deep knowledge and significant contacts within the industry that he or she has worked for years.  It may be important to the buyer that the seller not establish or join another entity that competes with the business he or she just purchased.  Non-competition provisions in this context are legally enforceable for significant periods of time and geographic distances, and are well-settled law in Arizona.

More than 40 years ago, the Arizona Court of Appeals upheld an agreement against a former business owner for non-competition within a 100-mile radius for 10 years.  Gann v. Morris, 596 P.2d 43 (Ariz. App. 1979).  Despite the scrutiny that non-competes in employment settings face, this ruling, in the context of a business sale, has been upheld in numerous subsequent cases.  “When a business is sold, the value of that business’s goodwill usually figures significantly into the purchase price. The buyer therefore deserves some protection from competition from the former owner.”  Valley Med. Specialists v. Farber, 982 P.2d 1277 (Ariz. 1999).

As excited and optimistic as you may feel, you need to be sure to protect your interests – whether you are the buyer or seller.  Making the effort to research the transaction so that you are not surprised after the fact, by something that was left unaddressed, will be time well spent.

If you are in this position, let’s have a conversation regarding the most advantageous type of transaction and how to best ensure that the proper information is disclosed and communicated – as early in your buying/selling process as possible.  Let me know how I can help.  Just click below to schedule some time to talk.

NOTE: THIS ARTICLE IS FOR GENERAL INFORMATIONAL PURPOSES. IT DOES NOT CONSTITUTE LEGAL ADVICE, NOR DOES IT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. EACH SITUATION IS DIFFERENT. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE YOUR LEGAL RIGHTS, REMEDIES, AND DUTIES.

By Wendy M. Anderson, Esq.
Law Office of Wendy Anderson, PLLC
480-825-4509
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