Lecture Notes: Buying and Selling Your Business - Keys to Success

Disclosure

• Material is general, for informational purposes only.
• Consult with professional advisors (CPAs, attorneys, SBTC's business counseling).

Overview

• Basics of buying and selling a business.
• Functional steps to buy/sell a business: steps, documents, negotiating strategies.
• Explore strategies for success.

Basics of Buying/Selling a Business

• Not simple but doesn’t have to be very hard.
• Essential to be creative and flexible during negotiations.
• Know what you’re agreeing to before signing anything.

Contract Essentials

• Have the right documents in place to create enforceable obligations.
• Contracts should be specific about the actions required by each party (assigning, transferring assets, etc.).
• Importance of knowing what you're signing.

Importance of Professional Advisors

• Attorneys help facilitate deals.
  • Litigation Attorneys: Focus on winning conflicts.
  • Transactional Attorneys: Facilitate deals, represent interests constructively.
• CPA or Accountants help with financial due diligence and tax impact analysis.

Stock Sale vs. Asset Sale

Stock Sale

• Easier transition (transfer of EIN, bank accounts, contracts, etc.).
• Tax benefits for seller: taxed at long-term capital gains rate (up to 20%).
• Buyer assumes all assets and liabilities.
• May not benefit from depreciation.

Asset Sale

• More complicated (new EIN, bank accounts, re-establish relationships).
• Allows buyer to depreciate assets for tax benefits.
• Seller may face higher tax rates (ordinary income rates up to 37%).

Setting Purchase Price

• Establish purchase price early on.
• Use metrics or formulas (e.g., percentage of revenue).
• Be creative, consider floor prices or reserved prices.
• Ensure value: assess where the value lies (e.g., brand, contracts, owner’s expertise).

Steps in Buying/Selling a Business

1. Discussions: Preliminary discussions and basic agreements.
2. Letter of Intent: Non-binding, sets basic terms, possible binding clauses (non-disclosure, exclusivity).
3. Due Diligence: Thorough review of company’s financials, history, and potential liabilities.
4. Negotiating the Purchase Agreement and Related Documents: Binding contracts, spells out all terms.
5. Continuing Due Diligence: Ongoing investigation if any new issues arise.
6. Closing: Transfer of assets, final payments, completing the sale.
7. Post-Closing Transition: Smooth handoff, title transfers, operational handovers.

Necessary Documents

• Stock Purchase Agreement / Asset Purchase Agreement: details of the transaction.
• Bill of Sale: Legal transfer of assets.
• Promissory Note: Evidence of debt if seller financing is involved.
• Security Agreement: Securing debt with assets.
• Other Essential Documents: UCC-1 filings, mortgages, non-compete agreements, post-closing service agreements, corporate resolutions, operating agreements.

Negotiating Strategies and Useful Information

1. Be Creative and Flexible: Find win-win scenarios.
2. Use Professional Advisors: Hire transactional attorneys, involve CPAs early.
3. Plan for the Worst: Mitigate risks (e.g., tax holdbacks, secure interests).
4. Trust but Verify: Take due diligence seriously, ensure the ability to walk away if issues are found.
5. Secure Interests: Secure your loan with assets, file proper documentation.
6. Use Resources: Engage with SBDC for no-cost counseling and advice.

Final Thoughts

• Structuring the purchase creatively (e.g., use of holding companies, S-Corp designation) for tax benefits and optimizing business operations post-purchase.
• Plan ahead to enhance business profitability.

Note: The importance of utilizing resourceful contacts and getting early professional advice cannot be overstated.