Buying and Selling Your Business - Keys to Success

it's good to be with you all again today today we're going to be talking about buying and selling your business keys to success a quick disclosure before we get started this is this material is all very general it's provided for informational purposes only it doesn't really represent necessarily your unique circumstances and i'll say this probably a hundred times in this presentation every business owner situation is unique so when you're looking about buying and selling and how you should go about it it it's just such a great idea to consult with professional advisors whether those are cpas attorneys again the sbtc's no cost business counseling is a great place to start so make sure you're really using your professional advisors and other resources available to you because this presentation really it doesn't get into some of the specifics that might apply to you but it does cover a good scope of what it looks like to buy and sell a business so without further ado we're going to get started in the presentation we're going to cover kind of the basics of how buying and selling a business looks uh then we're going to talk about you know functionally how do you do it how do you buy or sell a business what are the steps we're going to look at some of the documents you'll need we'll talk about some negotiating strategies and some useful info to have as you go about the process and when you talk about keys to success it's really important to look at some of these strategies and say okay how can i make this process work for me and then at the end we'll do a q a if we don't have questions enough time to fill i've got plenty of fun stories because the bulk of my practice is buying and selling businesses i'm going to help business owners buy and sell or reorganize merge start up close down i really i handle businesses in every stage of their life cycle so i've got some fun stories from as recently as last week about this so let's get started with the basics um you know a lot of you um if you're watching this this may not be your first rodeo you may have bought or sold a business before that might be how you got into business in the first place is buying a business whether from a third party or from an employer a lot of my clients they bought their business from their employer when their employer was ready to retire or sell that's a common succession plan and so you know a lot of you may have been through this already and maybe you had a good experience maybe you didn't but you you probably know it's not simple to buy and sell a business but it really doesn't have to be that hard either it doesn't have to be overly complicated i'm not saying go out and write a contract on a napkin for four hundred thousand dollars real example that came across my door last week don't do that but um you know there's a few basic things that you can do to make sure that you have you know if not a positive outcome because you can never guarantee anything in contracts or otherwise but if not a positive outcome you can at least make sure that you're doing everything possible to you know to protect yourself in these transactions so part of that is you know being creative when you're negotiating it's not you know the more rigid you are the harder it is to strike a deal and there may be situations where you have to get a little flexible to get the deal that you want and so creativity is really important but you know another basic key to success and i see this a lot where people sign and then ask what did i just sign don't do that i mean honestly it's one of those things where it's so much easier to fix before you sign than it is after know what you're agreeing to before you agree to it that's like one of the basic keys to success in these transactions is you know before you start signing things and handing over keys and handing over money really have a good sense for what you're agreeing to and part of that is having the right documents in place to create enforceable obligations you know a contract i talked about this in a previous workshop all a contract really is it's an agreement between two or more parties to do things one party is going to pay money one party is going to provide services or maybe they're going to sell the business etc and then within that you start breaking it down into all these little things that have to be done you know like for when you're selling a business you need to make sure that you assign and transfer all the assets you need to make sure that any contracts that are getting assigned are going to get assigned leases if those are going to get assigned they need to get done it usually involves some effort on the part of the seller and on the buyer you know the buyer has to engage in good faith to accomplish these things as well so having the right documents in place that spell out with some specificity what each party has to do is really key to a good successful business purchase or business sale and all of that you know you look at all of that and arguably the best thing that you can do is to get a lawyer on your side who actually practices in business transactions and i say that not as self-promotion there are tons of lawyers in this town who are good transactional lawyers and throughout the state of new mexico not just in albuquerque there's corner to corner to corner to corner good attorneys but what i'm getting at here is that there's two you break attorneys down there's there's two different types there's litigation attorneys who what they deal with is lawsuits and they deal with disputes and representing their client zealously which all attorneys should do but their goal is to win the conflict basically win or end the conflict then you have transactional attorneys whose job is to facilitate deals if as a transactional attorney if i have a client who comes to me and says this is what i want to do i have done the analysis i'm confident in the business decision this is what i want to do my job isn't to say okay let's do this and one up the other party every which way we can my job is to say okay let's figure out a way to accomplish your goals in a way that's constructive and collaborative and if at all possible accomplishes the other side's goals as well i mean you know if you have two transactional attorneys one on each side who know what they're doing have done this a while you can turn the process of buying and selling a business into a truly collaborative process that benefits everyone you look at kind of the win-win scenario versus kind of the zero-sum game that's really the difference between transactional litigation attorneys litigation is very often a zero-sum process and transactions are or at least so supposed to be collaborative so in breaking down these four basic keys to success that last one and you know i say this with a degree of emphasis because i had a deal fall through last week a 600 600 some thousand dollar deal uh because the other attorney who was a litigation attorney just didn't quite understand their role in the transaction and did pretty much everything possible to sync it so you know these are the basics now when we start drilling down into what you need to think about when you're selling a business because you know you talk about keys to success and understanding what it is you're agreeing to that really means understanding what a business sale looks like and there's two key types of it there's a stock sale and an asset sale i say stock very broadly because you know corporations have stock llc's have membership units partnerships have partnership interests etc so it's a question of what you're really selling but in broad brush strokes it's a stock sale versus an asset sale if you think of a company like an llc or a corporation is just a giant box full of assets you've got your equipment machinery furniture inventory that the intangibles the name the intellectual property the goodwill um everything an llc is basically a box that holds all of these assets and so when i say stock versus asset sale you can either sell the box in a stock sale which has all the assets still inside it or in an asset sale you open up the box you empty it out and sell everything from inside that box uh and then the buyer starts their own box they make their own box a brand new llc or corporation and puts all those assets into the new box there's reasons to do either uh and i'm about to cover them but you know that's something that almost no one who hasn't done this before thinks about and it's something that you really need to decide before you get too deep into the process and it's going to be a discussion between the buyer and the seller based on what each of them is going to get or lose because there's pros and cons for both but um you know let's look at stock first buying stock again buying or selling the box with all of its assets still inside of it is substantially easier when you think about purchase agreements i mean a stock purchase agreement can be 10 15 pages and all-inclusive asset purchase agreements could be substantially longer than that stock is easier because all you're really doing is you're transferring the business as a going concern still up and running so the buyer is going to buy the company that already exists with its ein it's bank accounts apparel providers its contracts employees uh independent contractors etc i mean you're buying the entire going concern so the the transition process is pretty minimal and easy which is nice and that's actually something that buyers look at as well as sellers you know it's the benefit of the buyer mainly because they're buying a company without having to do much to take it over the drawback and this is where you look at the tax side and as a tax attorney i go over this with every client it benefits the buyer more to buy assets than stock conversely benefits the seller to sell stock more than assets and the reason for this is you look at what is stock legally stock is a capital asset in the hands of whoever owns it and so if if i'm the seller of a corporation or an llc that's not a disregarded entity and i'm selling stock um and i've held this company for at least a year um i'm just getting taxed at the capital gains rate the long-term capital gains rate of up to 20 percent which is just for um the purchase price over my tax basis what what i've put into the company over the years so your gain might be pretty minimal selling the stock and whatever gain you have is taxed at a very preferential rate of 20 as compared to you know the ordinary income tax rates which can be up to 37 federally so needless to say for the seller selling the stock can be pretty beneficial but for the buyer you're taking the stock you're buying the box with the assets already inside of it um you know if the seller depreciated those assets for tax purposes and took the write-offs which why wouldn't they have done you're buying those assets pre-depreciated you can't redepreciate them so you're missing out on some potential tax write-offs over the coming years if you buy stock lastly when you buy stock you're buying the company as is which includes its assets and its liabilities both the liabilities under contract potential liabilities to people who might have a claim or a lawsuit against the company i mean you're buying kit and caboodle the whole darn thing so buying the stock is a bit of a risk to the buyer and tax-wise it doesn't work quite as well for them but you look at the flip side look at buying assets it's substantially more complicated because the buyer is going to have to set up a whole new entity you know they make their own box to put the assets into that new llc or corporation is going to need a new ein a new bank account new payroll provider if the selling company had any employees that buying company will have to re-establish a relationship with those employees because it's legally a whole new company so the buying entity will have to you know rehire those employees same with independent contractors so i'll have to set up new vendor relationships um new contracts for third parties if there's a lease a commercial lease it'll have to be assigned to the buying entity which can be a bit of a hassle so all these things are considerations like it's not a seamless transition when you do an asset purchase there are ways to make it as painless as possible but there's still a lot that goes into it but from a tax perspective an asset sale typically benefits the buyer at the expense of the seller and by that i mean you know when you're buying all of the assets out of the box you assign some part of the purchase price to each asset it's it's part of an irs requirement you say okay if i'm paying 500 000 for this company i'm going to assign 200 000 to the inventory 200 000 to the equipment and 100 000 to goodwill for example and then you turn around and you can redepreciate the assets um so you know that 200 000 you just assigned to equipment well equipment you can depreciate over three to five years typically so you take that purchase price and then you deduct it from taxes going forward so you know you can use that to offset a lot of taxable income which is money in the pocket of the buyer so [Music] asset purchase benefits buyer the seller on the other hand because like i said you allocate parts of the purchase price to the assets um if the seller already depreciated those assets and then you know the purchase price is higher than their depreciated value in the hands of the seller the seller's going to have to repay that depreciation as ordinary income which again 37 versus 20 so the seller might be paying 37 on some portion of the purchase price whereas they'd otherwise have paid 20 it's a math game and i say that because results really do vary depending on how much has been depreciated what assets are you actually buying how can those assets be depreciated or can they be depreciated you can't depreciate inventory for example so if you're buying a ton of inventory you can't depreciate it so maybe a stock purchase works out better for everyone if you're buying um certain intangibles you depreciated over 15 years that's a long time so maybe you know looking at this math problem you meet in the middle somewhere where you say okay i the buyer wants to do an asset purchase the seller is going to take this much of a tax hit i'm going to get this much tax benefit let's meet in the middle with the purchase price by renegotiating it that's what i'm talking about when i say it's not a zero-sum game you there's ways to do win-win scenarios even something as basic as stock versus asset sale so things to keep in mind there's no easy answer for which to choose and this is why again i'm going to harp on this repeatedly it's important to use your professionals when people hire me and ask me this question i say i can give you the theoreticals i can give you the academic answer here but really you need a cpa or accountant who can look at what's being sold in your depreciation and give you real numbers because real numbers are going to tell you okay i'm going to pay this much in taxes if i do a stock sale i'm going to pay this much if i do an asset sale is it a big difference yes no so use your professional advisors and your resources it's really going to help you especially if you involve them at the beginning of the process instead of in the middle or at the end uh one of the obviously one of the most basic considerations here is purchase price it's a material term that a lot of people don't pin down at the beginning of the process i have a lot of clients who they say okay we're gonna set a purchase price as we do the due diligence and it's going to be some percentage of revenue or some you know like something pegged to the revenue or profits of the business over the past few years and that's fine if that's what you both want to do but it's often my experience that that's what the buyer wants to do and not what the seller wants to do because the seller doesn't want to go into this blind where you know there's some math formula that's going to create the purchase price and they won't know towards the end of the process and so again looking at compromise solutions here we've often done that with some floor price some minimum purchase price where we say okay no matter what this math formula yields we're not going to accept a price below x and that right there you know it's like a reserved price in an auction if you don't get at least that much maybe it's worth holding on to the business or finding a different buyer so you know get creative with the purchase price if you need to and keep in mind you have options it's not oh if you don't meet this dollar amount right now we're going to walk away i mean it can be if that's your choice but there's there's ways to be flexible even with purchase price to make sure that you the seller are getting what you want and you the buyer are protecting yourselves from potentially overpaying something to consider when buying a business you really want to look at where's the value i'll give you an example here i sold a service providing company not too long ago where the primary value was with the owners you know the owners are the ones who are personally fulfilling each contract they're the ones engaging with clients so the clients knew them they were comfortable with them and it was an odd situation trying to figure out a purchase price because you have to figure out what is this company really worth without the owners who wanted to sell and retire because you know the inventory and equipment was negligible the name and trademarks are fine but you know there's not a lot of name recognition for what was a smaller company the value was really in the owners and so in order to get the owners uh you know the sellers the purchase price that they wanted so that they could retire they had to agree to some things what i call post-closing transition things so they had to agree to stay on for a year and provide transition services they would keep servicing the clients and their contracts they would train the buyers and how to do the same thing they had introduced the buyers to these clients and get the clients comfortable with the buyers so that way if nothing else at the end of this one year post-closing transition period the buyers had a fighting chance to keep servicing these clients they'd have some experience um some training from the sellers they could go and try and get new clients um this is another thing where again i'm to say this a thousand times be creative if the value of the business is with the the owners who want to sell and get out that doesn't mean it's impossible to do it just means you have to look at strategies to create value for the buyer if you can do that if you can create value for the buyer to up the purchase price and make the deal work great so now we're going to look at how do you actually buy or sell the business what are the steps in the process and you know how do you get the most out of each step yeah i break it down into basically seven parts the discussions the preliminary agreement the letter of intent which memorializes that puts it in writing make sure both parties are roughly on the same page before you get into the more complicated and expensive parts of the process then there's the due diligence you know investigating looking into the company and its finances and whatnot there's negotiating the purchase agreement and other documents um continuing due diligence which depending on when the closing is you might have more of a due diligence period um there's the closing process and then there's the post-closing transition which like i talked about it's the handoff of the business and as anything that the parties are going to have to keep doing after the closing so you start looking at um how a deal comes together in the first place um it all starts with the would-be buyer and seller connecting and discussing terms how they connect is you know it varies uh if you like i said a common example is employees buying the business from the owner who's looking to retire it's very common succession plan so maybe the owner reaches out to some key employees and says hey i'm getting to that age where i just don't want to keep doing this anymore you've shown that you're able to do it do you want to buy this company for me and then you connect and say okay this is what i can reasonably pay i'm gonna have to pay it over time maybe or i can get some financing etc the parties connect maybe it's um you know they're the parties the buyer and seller are introduced by a common friend a third party who knows them both maybe they use business brokers which business brokers they're like real estate brokers who specialize in um helping buyers and sellers connect and helping facilitate these purchases and sales i work with a number of business brokers in my practice because they you know they are well established in the community they can find buyers they can find sellers they help facilitate the transaction get the documents done get the deal done they bring me as an attorney and to make sure that either the buyer the seller is well represented and then there you have it but no matter how they connect you got to come to some kind of a meeting of the minds do you have to do that at the beginning i cannot emphasize that enough because i've had people i've had clients who say well we don't really have a firm deal yet but we want to get started on the process and then we'll figure it out as we go um spoiler alert they don't figure it out as they go they get to some critical stage in the purchase agreement process and then realize oh we really don't have the meeting of the mines they're not going to pay what i want them to pay or the seller isn't going to sell for what i want them to sell it for so now i have to walk away having spent all that money if you can't come to an agreement in principle without getting further into the process there's a bit of a concern there and like i said sometimes the agreement doesn't involve a set purchase price maybe due diligence needs to happen but there should be some parameters that you've reached before moving forward um so you're at this stage um if discussions progress far enough what often happens is the buyer has to sign a non-disclosure agreement saying okay before i can really make a real offer to buy this business i need to see some basic financials i need to know what this company really brings in i don't even need to deep dive at this stage but i need to know what this company is really bringing in what it's pro basic profitability is so you sign a non-disclosure agreement as the buyer then the seller discloses that the buyer looks it over usually with the assistance of their accountant or cpa and then the buyer makes an offer if the seller is in agreement on that basic offer you have like i said basic meeting of the minds uh once you have that basic meeting of the minds you go to the letter of intent stage um the letter of intent it's it's not really a binding document usually i mean it might have some binding provisions like again non-disclosure confidentiality exclusivity is a common binding provision saying okay the seller will not try and sell to anyone else while buyer is exploring this purchase that's a common binding provision of the letter of intent but otherwise it's non-binding it doesn't commit the buyer or the seller to move forward with the transaction if they later realize it's not in their interests so the letter of intent should have at a minimum what's being purchased again stock or asset purchase what the purchase price is or how it'll be determined again if it's not set then what's the formula or metric for it and what are the parties going to be expected to do in loose terms post-closing will the seller be expected to stay on as an employee will they have to train the buyer and their management team throw that into the letter of intent once the parties are on the same page you know once they're in agreement on it and once they they've looked it over they're comfortable maybe they've had their attorneys look it over again get the attorneys and the team involved earlier rather than later so you don't have to go back and renegotiate the letter of intent but once everyone is comfortable with it they sign it you sign the letter of intent [Music] and then that kicks off a number of processes that run simultaneously in most cases most letters of intent themselves create the due diligence process some don't and we'll talk about that in a second some um will defer to the purchase agreement and some daring and bold buyers won't even insist on a due diligence process they're just going to buy the business kind of site unseen but by and large the letter of intent will establish a due diligence process which is basically a deep dive for view of the company's financial records history performance and general status includes tax returns profit and loss statements the books the records instances of employee discipline or employee claims workers comp claims etc i mean due diligence is the opportunity for the buyer to really take a good look at what they're buying before they move forward i cannot recommend enough taking due diligence seriously and actually making an effort to get what you need because if you're afforded a due diligence opportunity in the letter of intent and the purchase agreement and whatnot and you don't take advantage of it you don't look at anything and then you buy the business the purchase agreement is going to have a little clause that says the buyer has had ample opportunity to do due diligence they're satisfied with the due diligence and they're buying the business as is now that's not to say that the seller can get off scott free if for example they have a bunch of unpaid taxes or a bunch of un unknown claims that come out of the woodwork there's separate provisions of the purchase agreement that would typically say okay if there are these sorts of issues the seller is going to have to indemnify the buyer for you know these issues but um at the same time you don't want to be the buyer in that situation going in front of the court and saying your honor i really didn't know what i was buying despite having the opportunity to check and look i just didn't know because i didn't take advantage of it courts aren't really going to look favorably on that so due diligence is an important process so in terms of due diligence um except get your accountants on board they can usually recommend what you should ask for i know we've got a list when we help with due diligence there's a laundry list of things that we'll ask for just as a matter of course make sure you get that done once you get past the loi stage the other thing you start doing at the same time is due diligence once you get past the letter of intent stage you move into the purchase agreement and other documents this is the binding contract the purchase agreement and the related documents the bill of sale if there's seller financing involved where the buyer is going to pay the seller over time for the purchase price you'd have a promissory note you'd probably have a security agreement to secure the the seller finance loan against the assets of the company that's being purchased things like that but you start working on these in earnest usually while due diligence is happening um sometimes if you have a lot of time to play with here you'll wait until after due diligence to begin negotiating these documents but more often than not you're going to be doing them at the same time partly because most buyers don't want to wait that long to buy the business partly because most sellers don't want to wait that long to sell it you also don't want to have to have the seller maintain the status quo where they're keeping the business of flow without changing it you don't want to risk changing conditions after due diligence is completed there's a number of reasons why you do these things simultaneously so you do the purchase agreement and the other documents and i can't emphasize this enough this is the last chance the last on-ramp to have an attorney join you in making this deal what you want it to be because once you sign the purchase agreement and the other binding contracts you typically can't change them without the consent of the other party so if there's something in there that's unfavorable to you that maybe you don't understand or you didn't catch this is where you have an attorney who's there to represent your interests who will look at the agreement and say no this doesn't actually line up with what we agreed to this isn't going to work for my client we need to fix it you know i had someone i mentioned the napkin thing i had someone come into the office last week who bought a business for 450 000 ish give or take um with something that amounted to a napkin contract uh like a one-page purchase agreement that was so riddled with errors and inconsistencies that i really don't know how it would be enforced if it went in front of a court you know one of the good maxims of contract drafting is it needs to be enforceable but also needs to be predictable you need to be able to look at the thing and have some degree of certainty where you know if one party violated their obligations and didn't come through you'd want to know with some certainty what would happen there and with those fly-by-night contracts you know the templates that are pulled off the internet that are two or three pages and then the parties just kind of fill in some blanks or change the things the biggest problem i see with them isn't even that they don't accomplish a sale because they'll accomplish a sale most of the time but you never really know what's going to happen after the fact because they don't contain the obligations of the parties um they might be riddled with errors that prevent it's being enforced a lot of different things can go wrong there so this is your last chance to get an attorney involved proactively anything you do after this stage after the signing is going to be reactive if there's some problem with the agreement you didn't catch and you need to hire an attorney it's reacting to the problem and maybe you can fix it maybe you can't but like i said um use your resources that are available to you at this stage if not well before it so after this stage you move on to continuing due diligence and i say this because a lot of purchase agreements themselves will provide their own due diligence period unless the loi did you know if the loi gave you two months of due diligence for example or one month and then you negotiate the purchase agreement you just close right after signing that's pretty normal but if the letter of intent didn't have a due diligence clause often what happens is the parties say we're going to wait until we do the purchase agreement and the purchase agreement will have due diligence in it and then a closing sometime after due diligence is done in which case cool um the purchase agreement needs to have a provision where the buyer can walk away i saw this once where the the seller tried to pull one over on the buyer by having a due diligence period and then closing right after it but there was literally no way in the contract for the buyer to walk away if due diligence turned up something bad turn up a red flag so the buyer did the due diligence they you know they they saw all these problems and the seller was like well that's too bad you can't really walk away from this and it was a whole dispute i don't remember how that ended it was a few years ago but the point is don't um you know if you're gonna do due diligence this way make sure the purchase agreement lets the buyer walk away because the purchase agreement is binding whereas a letter of intent isn't so things to keep in mind after all that all of that is said and done you move on to closing closing is where everyone you know the the deal is done the deliverables are handed off the purchase price the bill of sale etc the business changes hands from the seller to the buyer money starts moving from the buyer to the seller if not all at once then according to whatever financing terms are in place closing can happen i mean you can get flexible with the closing date so it um it can be a bit of a moving target especially if there are contingencies beyond the party's control an example of that is things that the secretary of state needs to do where tax and rev needs to do things landlords need to do assignments of leases assignments of contracts etc so if you know there are these contingencies it's important to give the parties flexibility to set the closing date as soon as the contingencies are met you know i've seen deals almost fail actually i saw one fail because there was a closing date that was fixed couldn't be moved the party started getting into disagreements after signing the purchase agreement and when closing didn't happen on time because the purchase agreement set the closing date and the contingencies prevented it um one of the parties said okay the deal has failed and they walked away so flexibility here is important post-closing transition this is the part of the deal where um you know the parties are doing what they said they would do afterwards if the seller is staying on as an employee they stay on as an employee maybe they're training the buyers their management team etc this is also where a lot of property gets retitled or repeated for example a real property commercial buildings etc will need to get repeated if they were owned by the seller and this is an asset purchase so you need to record the deeds which usually happens right after closing same with cars you need to go to the mvd and do the titles for those there's a lot of little mechanical things handoff of bank accounts something as simple as handing off the keys the security alarm accounts payroll accounts things like that changing the names on all these accounts so it can be a process that happens after closing and you need to plan for that and have a good sense of what needs to be done before closing that way once closing happens you can just start doing it one after the other after the other the one thing you really don't want to do is drag this out too long because then you might get to a point six months down the road where you realize oh i never got my name substituted on this particular bank account or something and the seller is either gone maybe the relationship is broken down with the seller you never know but you really don't want to be in a position where you're still asking the seller for these sorts of things you know months or years down the road now i'm really quick going to go over some of the documents that you'll need for this sale and then i'm going to jump into the negotiating strategies and some useful info for you [Music] so a non-exhaustive list and i say that because again these deals can look very different depending on the buyer the seller the agreement but some basic things you'll need a stock purchase agreement or asset purchase agreement depending on the nature of the sale a bill of sale the bill of sale is just the document that legally transfers the assets that can be transferred that way you know stock purchase agreement or an asset purchase agreement says so-and-so agrees to transfer the assets it's an agreement to do something the bill of sale says so and so does hereby on this date transfer the assets so the bill of sale it's often overlooked but it's very necessary because without it all you have is an agreement to transfer the assets there's nothing legally doing it in the moment so you've got the bill of sale you've got if there's seller financing you know if the seller says okay you the buyer can pay me over a period of months or years or whatnot you need a promissory note that's just the basic debt instrument to evidence the the debt owed by the buyer to the seller uh promissory notes they're ubiquitous you might not even know you've signed them but you know a certain debt um car loans for example are always backed by a promissory note uh when you buy a house with a mortgage there's a promise or a note that's a part of that mortgage so it's just a simple debt instrument but with that simple debt instrument comes the question are you going to collateralize it is there something that's going to secure this debt so if the buyer stops paying you the seller have some recourse against specific assets if the answer is yes and very commonly is you have what's called a security agreement sometimes the security agreement is baked into the promissory note as a section of it sometimes it's a separate document i've done them both ways depending on what my clients want but it spells out specific assets they're going to be used to protect the seller's interest it can be generalized as you know all assets of the company etc etc but it spells out what's going to be used as collateral after that assuming you're going to do that you pair that with [Music] the other documents needed to perfect those security interests and i'll give you some examples here if you're taking an interest in the assets generally of the company think equipment inventory etc assets other than vehicles real property depository accounts bank accounts etc you perfect those by filing what's called a ucc one financing statement you file that with the ucc department up in santa fe you can do it online it's pretty straightforward and simple but you prepare that and then you record it and that recorded financing statement lets any other potential creditor know that you already have a security interest in these assets so it fixes your place in line if someone else lends to the buyer uh with an interest in the assets they're behind you in priority assuming you perfect your security interests same with um real property you know if you're selling a company that has a commercial building and the buyer is going to pay you over time and you want a security interest in that real property you need a mortgage against it and you need to record that mortgage with the county clerk of the county in which the property resides that is how you perfect your security interest in real property so you do that and then any would-be creditors on notice that you already have a security interest in that property and it prevents the the the buyer of your company from turning around and selling that property you know if they sell it is subject to a mortgage you have first rates as a secured party so it's really important to do all these little things these are little things that get overlooked pretty commonly but when you overlook them [Music] things fall through and then if for example the buyer stops paying if you didn't perfect your security interest or if you don't even have them you might have no recourse you might not be able to go and collect what you're owed as part of the purchase price so you know i'll talk about this later as a strategy but make sure you're doing you're dotting your eyes and crossing your t's to protect yourself as the seller in this scenario finally you've got things like non-compete non-solicitation agreements so that the seller can't turn around and compete with the business that you sold you've got the post post closing services agreement if the seller is going to stay on as an employee or as a contractor you've got corporate resolutions authorizing transactions these are just basic internal documents the sort of again dotting your eyes and crushing your tees things and then last you've got the operating agreement for llc's or bylaws and shareholders agreement for corporations these are just the governing documents of the company that will provide for how things are going to happen going forward voting transfer of ownership interests etc etc you'd want to make sure that you you as the buyer have those in place moving forward after the purchase so some negotiating strategies and useful info uh this is stuff where you know as you're going forward in the process you really want to keep it in mind and make sure that you're not overlooking something you should be doing um strategy one and this is something i covered in the beginning of the presentation but it's worth reiterating um negotiations aren't an all or nothing endeavor at least they don't have to be unless you want them to be there are some things where you might draw a line in the sand and say okay i'm not willing to accept less than this is the purchase price or i'm not willing to do a stock purchase instead of an asset purchase there are some things where maybe you know your priorities require that and that's fine but you really have to look at what your red lines are and if something isn't critically important to you maybe don't make it into an all or nothing conflict and this is again where we get into litigation versus transactional attorneys every single thing when a litigation attorney tries to negotiate these sorts of deals becomes an all-or-nothing decision or proposition there are win-win situations to be had if you get creative with the deal so i'd really encourage you where possible to figure out ways where you can benefit and the other party can benefit is possible in a lot of cases so that's my first strategy recommendation right there is be creative be flexible figure out what's going to get you the maximum benefit possible while also benefiting the other party and there are definitely ways to do that again hire a transactional attorney um it's i harp on this because again i just had a deal fall through because someone hired a family friend who's a litigation attorney who did everything humanly possible to torpedo the transaction so it these sorts of things matter if you actually want to get your deal done and it's not just transactional attorneys you see the help tip at the bottom having a good accountant or cpa is immensely helpful when you're doing the due diligence when you're figuring out the tax consequences to you in the purchase or sale i mean they're the numbers people they're the people who do the math to make sure that you have an understanding of what the consequences of the transaction good and bad will be so the earlier you get those folks involved the easier your transaction is going to be just easy rule strategy number three hope for the best but plan for the worst there is no surefire way to guarantee the performance of the other party in the sale um it's just the honest truth i can make the best darn purchase and sale agreement you have ever seen with all of the other documents that you might possibly want and need and that's not going to guarantee that the other party doesn't flake out doesn't disappear into the wind i mean you see it often with sellers who throw up their hands and um you know they take the as much of the purchase price as they get whether that's 100 up front or whether that's you know some percentage up front and then they disappear into the wind and then the buyer finds out that uh what they bought you know they bought a lemon they bought a company that's riddled with tax debt they bought a company that is um [Music] uh you know riddled with other potential claims maybe there's uh the threat of a lawsuit that the seller knew about but didn't disclose to the buyer and then the sale happened and then the buyer gets sued the seller says well that's your problem and they disappear in the wind and move to uh belize that's a real example that happened a few years ago um there's no surefire way to guarantee the performance of the other party so what i tell people even though you can't do that there are very important and usually easy ways to mitigate the risk of non-performance or mitigate the risk of issues that might crop up so for example you know if you're the buyer of the company and you're not absolutely certain that there are um tax debts outstanding like if you're not absolutely certain that the seller has paid their taxes and that's income taxes gross receipts taxes and especially payroll taxes if you're not confident that all of those have been paid properly um you can negotiate a hold back from the purchase price in fact new mexico law provides for that hold back statute 7 161 specifically for gross receipts it provides that you know the buyer of a business is liable for the gross receipt tax debt of the seller as was called a successor in business but the buyer can request a tax clearance certificate from the state that says there are no taxes owed the state is notoriously slow at getting those out but the buyer can also hold back a part of the purchase price that would otherwise get paid to seller to cover some theoretical tax debt that might crop up in the future i use holdbacks all the time for this sort of thing so you know those are the sorts of options you might have and again having good enforceable indemnification agreements as against the seller having security interests and assets if you're the seller helps so that you know if the buyer does something underhanded tries to sell out all the assets you transfer them and then close up shop and start something new and stop paying the seller etc there are ways to protect yourself and so consult with your professionals your attorneys and otherwise and do the little things that might seem pointless especially if you're comfortable with the other party i mean i know a lot of the times the buyer and seller know each other they say oh they'll never cheat me and i get that and i'm not gonna say oh so-and-so could well cheat you but i will say is prepare for the possibility it never hurts to do the little things to protect your interests and on that note trust but verify i know i'm pulling that right out of the 80s but it works as a saying here because again you have the opportunity with due diligence to do exactly that you have the opportunity to look at everything and have your cpa or accountant or lawyer look at it with you and then again make sure that you have the ability to walk away if you turn up red flags if you turn up something that clearly wasn't disclosed that you didn't know about that's going to impact the value of what you're buying or make it too too much of a high risk proposition due diligence is your friend so make sure as the buyer that you're doing due diligence and then strategy number five and i've talked about this already security's worth a thousand notes um you have a thousand promissory notes which promises you money but security interest in the assets gives you something real something material to go after if the buyer stops paying um so make sure that you're getting those security interests make sure you're recording them and perfecting them so that you can go after the assets and so that you don't get booted by other creditors who come later if you don't perfect your security interest in the assets some other creditor might come along and do exactly that in which case you are now behind that creditor in line you know that creditor gets paid first before you do so do the things secure your interests uh it will pay dividends later if things fall through with the buyer and lastly and this is just very general utilize your resources every business business owner situation is unique it's important to work with the knowledgeable professionals who can represent your interests and help you through the transaction again sbdc nmsbdc.org reach out to your local new mexico small business development center liaison go to the website uh set up a no-cost business counseling session i mean they are a great resource that's no cost to you that can help you start moving in the right direction based on what your interests and priorities are they have a great network of resources and contacts in the state of new mexico if they can't help you they can point you in the right direction someone who can so really that's a great resource to avail yourself of and then by and large just make sure you're using your resources throughout the process so final thoughts the one thing i didn't really cover here that uh is worth considering is that when you're buying a business especially you can get really creative about how you structure the purchase especially if you're doing an asset purchase but you know through the use of holding companies and clever use of taxation strategies where you're you know maybe making an s corp designation for your holding company or things like that i mean there are ways when you buy a business to go beyond just the basic purchase to really optimize the entire process moving forward for tax purposes so it's that's another consideration to really make is you know especially if you have more than one business or if you're expanding or doing something like that how can i make this work for me in a larger sense even after the purchase and so again use your resources your a tax account into your cpa consult with them to figure out what the best tax strategy is for you because um you know in your hands moving forward you can take a business that was already profitable and make it more profitable you can take a business that was struggling and maybe make it profitable it's all about having the good plan in place ahead of time you

it&#39;s good to be with you all again today today we&#39;re going to be talking about buying and selling your business keys to success a quick disclosure before we get started this is this material is all very general it&#39;s provided for informational purposes only it doesn&#39;t really represent necessarily your unique circumstances and i&#39;ll say this probably a hundred times in this presentation every business owner situation is unique so when you&#39;re looking about buying and selling and how you should go about it it it&#39;s just such a great idea to consult with professional advisors whether those are cpas attorneys again the sbtc&#39;s no cost business counseling is a great place to start so make sure you&#39;re really using your professional advisors and other resources available to you because this presentation really it doesn&#39;t get into some of the specifics that might apply to you but it does cover a good scope of what it looks like to buy and sell a business so without further ado we&#39;re going to get started in the presentation we&#39;re going to cover kind of the basics of how buying and selling a business looks uh then we&#39;re going to talk about you know functionally how do you do it how do you buy or sell a business what are the steps we&#39;re going to look at some of the documents you&#39;ll need we&#39;ll talk about some negotiating strategies and some useful info to have as you go about the process and when you talk about keys to success it&#39;s really important to look at some of these strategies and say okay how can i make this process work for me and then at the end we&#39;ll do a q a if we don&#39;t have questions enough time to fill i&#39;ve got plenty of fun stories because the bulk of my practice is buying and selling businesses i&#39;m going to help business owners buy and sell or reorganize merge start up close down i really i handle businesses in every stage of their life cycle so i&#39;ve got some fun stories from as recently as last week about this so let&#39;s get started with the basics um you know a lot of you um if you&#39;re watching this this may not be your first rodeo you may have bought or sold a business before that might be how you got into business in the first place is buying a business whether from a third party or from an employer a lot of my clients they bought their business from their employer when their employer was ready to retire or sell that&#39;s a common succession plan and so you know a lot of you may have been through this already and maybe you had a good experience maybe you didn&#39;t but you you probably know it&#39;s not simple to buy and sell a business but it really doesn&#39;t have to be that hard either it doesn&#39;t have to be overly complicated i&#39;m not saying go out and write a contract on a napkin for four hundred thousand dollars real example that came across my door last week don&#39;t do that but um you know there&#39;s a few basic things that you can do to make sure that you have you know if not a positive outcome because you can never guarantee anything in contracts or otherwise but if not a positive outcome you can at least make sure that you&#39;re doing everything possible to you know to protect yourself in these transactions so part of that is you know being creative when you&#39;re negotiating it&#39;s not you know the more rigid you are the harder it is to strike a deal and there may be situations where you have to get a little flexible to get the deal that you want and so creativity is really important but you know another basic key to success and i see this a lot where people sign and then ask what did i just sign don&#39;t do that i mean honestly it&#39;s one of those things where it&#39;s so much easier to fix before you sign than it is after know what you&#39;re agreeing to before you agree to it that&#39;s like one of the basic keys to success in these transactions is you know before you start signing things and handing over keys and handing over money really have a good sense for what you&#39;re agreeing to and part of that is having the right documents in place to create enforceable obligations you know a contract i talked about this in a previous workshop all a contract really is it&#39;s an agreement between two or more parties to do things one party is going to pay money one party is going to provide services or maybe they&#39;re going to sell the business etc and then within that you start breaking it down into all these little things that have to be done you know like for when you&#39;re selling a business you need to make sure that you assign and transfer all the assets you need to make sure that any contracts that are getting assigned are going to get assigned leases if those are going to get assigned they need to get done it usually involves some effort on the part of the seller and on the buyer you know the buyer has to engage in good faith to accomplish these things as well so having the right documents in place that spell out with some specificity what each party has to do is really key to a good successful business purchase or business sale and all of that you know you look at all of that and arguably the best thing that you can do is to get a lawyer on your side who actually practices in business transactions and i say that not as self-promotion there are tons of lawyers in this town who are good transactional lawyers and throughout the state of new mexico not just in albuquerque there&#39;s corner to corner to corner to corner good attorneys but what i&#39;m getting at here is that there&#39;s two you break attorneys down there&#39;s there&#39;s two different types there&#39;s litigation attorneys who what they deal with is lawsuits and they deal with disputes and representing their client zealously which all attorneys should do but their goal is to win the conflict basically win or end the conflict then you have transactional attorneys whose job is to facilitate deals if as a transactional attorney if i have a client who comes to me and says this is what i want to do i have done the analysis i&#39;m confident in the business decision this is what i want to do my job isn&#39;t to say okay let&#39;s do this and one up the other party every which way we can my job is to say okay let&#39;s figure out a way to accomplish your goals in a way that&#39;s constructive and collaborative and if at all possible accomplishes the other side&#39;s goals as well i mean you know if you have two transactional attorneys one on each side who know what they&#39;re doing have done this a while you can turn the process of buying and selling a business into a truly collaborative process that benefits everyone you look at kind of the win-win scenario versus kind of the zero-sum game that&#39;s really the difference between transactional litigation attorneys litigation is very often a zero-sum process and transactions are or at least so supposed to be collaborative so in breaking down these four basic keys to success that last one and you know i say this with a degree of emphasis because i had a deal fall through last week a 600 600 some thousand dollar deal uh because the other attorney who was a litigation attorney just didn&#39;t quite understand their role in the transaction and did pretty much everything possible to sync it so you know these are the basics now when we start drilling down into what you need to think about when you&#39;re selling a business because you know you talk about keys to success and understanding what it is you&#39;re agreeing to that really means understanding what a business sale looks like and there&#39;s two key types of it there&#39;s a stock sale and an asset sale i say stock very broadly because you know corporations have stock llc&#39;s have membership units partnerships have partnership interests etc so it&#39;s a question of what you&#39;re really selling but in broad brush strokes it&#39;s a stock sale versus an asset sale if you think of a company like an llc or a corporation is just a giant box full of assets you&#39;ve got your equipment machinery furniture inventory that the intangibles the name the intellectual property the goodwill um everything an llc is basically a box that holds all of these assets and so when i say stock versus asset sale you can either sell the box in a stock sale which has all the assets still inside it or in an asset sale you open up the box you empty it out and sell everything from inside that box uh and then the buyer starts their own box they make their own box a brand new llc or corporation and puts all those assets into the new box there&#39;s reasons to do either uh and i&#39;m about to cover them but you know that&#39;s something that almost no one who hasn&#39;t done this before thinks about and it&#39;s something that you really need to decide before you get too deep into the process and it&#39;s going to be a discussion between the buyer and the seller based on what each of them is going to get or lose because there&#39;s pros and cons for both but um you know let&#39;s look at stock first buying stock again buying or selling the box with all of its assets still inside of it is substantially easier when you think about purchase agreements i mean a stock purchase agreement can be 10 15 pages and all-inclusive asset purchase agreements could be substantially longer than that stock is easier because all you&#39;re really doing is you&#39;re transferring the business as a going concern still up and running so the buyer is going to buy the company that already exists with its ein it&#39;s bank accounts apparel providers its contracts employees uh independent contractors etc i mean you&#39;re buying the entire going concern so the the transition process is pretty minimal and easy which is nice and that&#39;s actually something that buyers look at as well as sellers you know it&#39;s the benefit of the buyer mainly because they&#39;re buying a company without having to do much to take it over the drawback and this is where you look at the tax side and as a tax attorney i go over this with every client it benefits the buyer more to buy assets than stock conversely benefits the seller to sell stock more than assets and the reason for this is you look at what is stock legally stock is a capital asset in the hands of whoever owns it and so if if i&#39;m the seller of a corporation or an llc that&#39;s not a disregarded entity and i&#39;m selling stock um and i&#39;ve held this company for at least a year um i&#39;m just getting taxed at the capital gains rate the long-term capital gains rate of up to 20 percent which is just for um the purchase price over my tax basis what what i&#39;ve put into the company over the years so your gain might be pretty minimal selling the stock and whatever gain you have is taxed at a very preferential rate of 20 as compared to you know the ordinary income tax rates which can be up to 37 federally so needless to say for the seller selling the stock can be pretty beneficial but for the buyer you&#39;re taking the stock you&#39;re buying the box with the assets already inside of it um you know if the seller depreciated those assets for tax purposes and took the write-offs which why wouldn&#39;t they have done you&#39;re buying those assets pre-depreciated you can&#39;t redepreciate them so you&#39;re missing out on some potential tax write-offs over the coming years if you buy stock lastly when you buy stock you&#39;re buying the company as is which includes its assets and its liabilities both the liabilities under contract potential liabilities to people who might have a claim or a lawsuit against the company i mean you&#39;re buying kit and caboodle the whole darn thing so buying the stock is a bit of a risk to the buyer and tax-wise it doesn&#39;t work quite as well for them but you look at the flip side look at buying assets it&#39;s substantially more complicated because the buyer is going to have to set up a whole new entity you know they make their own box to put the assets into that new llc or corporation is going to need a new ein a new bank account new payroll provider if the selling company had any employees that buying company will have to re-establish a relationship with those employees because it&#39;s legally a whole new company so the buying entity will have to you know rehire those employees same with independent contractors so i&#39;ll have to set up new vendor relationships um new contracts for third parties if there&#39;s a lease a commercial lease it&#39;ll have to be assigned to the buying entity which can be a bit of a hassle so all these things are considerations like it&#39;s not a seamless transition when you do an asset purchase there are ways to make it as painless as possible but there&#39;s still a lot that goes into it but from a tax perspective an asset sale typically benefits the buyer at the expense of the seller and by that i mean you know when you&#39;re buying all of the assets out of the box you assign some part of the purchase price to each asset it&#39;s it&#39;s part of an irs requirement you say okay if i&#39;m paying 500 000 for this company i&#39;m going to assign 200 000 to the inventory 200 000 to the equipment and 100 000 to goodwill for example and then you turn around and you can redepreciate the assets um so you know that 200 000 you just assigned to equipment well equipment you can depreciate over three to five years typically so you take that purchase price and then you deduct it from taxes going forward so you know you can use that to offset a lot of taxable income which is money in the pocket of the buyer so [Music] asset purchase benefits buyer the seller on the other hand because like i said you allocate parts of the purchase price to the assets um if the seller already depreciated those assets and then you know the purchase price is higher than their depreciated value in the hands of the seller the seller&#39;s going to have to repay that depreciation as ordinary income which again 37 versus 20 so the seller might be paying 37 on some portion of the purchase price whereas they&#39;d otherwise have paid 20 it&#39;s a math game and i say that because results really do vary depending on how much has been depreciated what assets are you actually buying how can those assets be depreciated or can they be depreciated you can&#39;t depreciate inventory for example so if you&#39;re buying a ton of inventory you can&#39;t depreciate it so maybe a stock purchase works out better for everyone if you&#39;re buying um certain intangibles you depreciated over 15 years that&#39;s a long time so maybe you know looking at this math problem you meet in the middle somewhere where you say okay i the buyer wants to do an asset purchase the seller is going to take this much of a tax hit i&#39;m going to get this much tax benefit let&#39;s meet in the middle with the purchase price by renegotiating it that&#39;s what i&#39;m talking about when i say it&#39;s not a zero-sum game you there&#39;s ways to do win-win scenarios even something as basic as stock versus asset sale so things to keep in mind there&#39;s no easy answer for which to choose and this is why again i&#39;m going to harp on this repeatedly it&#39;s important to use your professionals when people hire me and ask me this question i say i can give you the theoreticals i can give you the academic answer here but really you need a cpa or accountant who can look at what&#39;s being sold in your depreciation and give you real numbers because real numbers are going to tell you okay i&#39;m going to pay this much in taxes if i do a stock sale i&#39;m going to pay this much if i do an asset sale is it a big difference yes no so use your professional advisors and your resources it&#39;s really going to help you especially if you involve them at the beginning of the process instead of in the middle or at the end uh one of the obviously one of the most basic considerations here is purchase price it&#39;s a material term that a lot of people don&#39;t pin down at the beginning of the process i have a lot of clients who they say okay we&#39;re gonna set a purchase price as we do the due diligence and it&#39;s going to be some percentage of revenue or some you know like something pegged to the revenue or profits of the business over the past few years and that&#39;s fine if that&#39;s what you both want to do but it&#39;s often my experience that that&#39;s what the buyer wants to do and not what the seller wants to do because the seller doesn&#39;t want to go into this blind where you know there&#39;s some math formula that&#39;s going to create the purchase price and they won&#39;t know towards the end of the process and so again looking at compromise solutions here we&#39;ve often done that with some floor price some minimum purchase price where we say okay no matter what this math formula yields we&#39;re not going to accept a price below x and that right there you know it&#39;s like a reserved price in an auction if you don&#39;t get at least that much maybe it&#39;s worth holding on to the business or finding a different buyer so you know get creative with the purchase price if you need to and keep in mind you have options it&#39;s not oh if you don&#39;t meet this dollar amount right now we&#39;re going to walk away i mean it can be if that&#39;s your choice but there&#39;s there&#39;s ways to be flexible even with purchase price to make sure that you the seller are getting what you want and you the buyer are protecting yourselves from potentially overpaying something to consider when buying a business you really want to look at where&#39;s the value i&#39;ll give you an example here i sold a service providing company not too long ago where the primary value was with the owners you know the owners are the ones who are personally fulfilling each contract they&#39;re the ones engaging with clients so the clients knew them they were comfortable with them and it was an odd situation trying to figure out a purchase price because you have to figure out what is this company really worth without the owners who wanted to sell and retire because you know the inventory and equipment was negligible the name and trademarks are fine but you know there&#39;s not a lot of name recognition for what was a smaller company the value was really in the owners and so in order to get the owners uh you know the sellers the purchase price that they wanted so that they could retire they had to agree to some things what i call post-closing transition things so they had to agree to stay on for a year and provide transition services they would keep servicing the clients and their contracts they would train the buyers and how to do the same thing they had introduced the buyers to these clients and get the clients comfortable with the buyers so that way if nothing else at the end of this one year post-closing transition period the buyers had a fighting chance to keep servicing these clients they&#39;d have some experience um some training from the sellers they could go and try and get new clients um this is another thing where again i&#39;m to say this a thousand times be creative if the value of the business is with the the owners who want to sell and get out that doesn&#39;t mean it&#39;s impossible to do it just means you have to look at strategies to create value for the buyer if you can do that if you can create value for the buyer to up the purchase price and make the deal work great so now we&#39;re going to look at how do you actually buy or sell the business what are the steps in the process and you know how do you get the most out of each step yeah i break it down into basically seven parts the discussions the preliminary agreement the letter of intent which memorializes that puts it in writing make sure both parties are roughly on the same page before you get into the more complicated and expensive parts of the process then there&#39;s the due diligence you know investigating looking into the company and its finances and whatnot there&#39;s negotiating the purchase agreement and other documents um continuing due diligence which depending on when the closing is you might have more of a due diligence period um there&#39;s the closing process and then there&#39;s the post-closing transition which like i talked about it&#39;s the handoff of the business and as anything that the parties are going to have to keep doing after the closing so you start looking at um how a deal comes together in the first place um it all starts with the would-be buyer and seller connecting and discussing terms how they connect is you know it varies uh if you like i said a common example is employees buying the business from the owner who&#39;s looking to retire it&#39;s very common succession plan so maybe the owner reaches out to some key employees and says hey i&#39;m getting to that age where i just don&#39;t want to keep doing this anymore you&#39;ve shown that you&#39;re able to do it do you want to buy this company for me and then you connect and say okay this is what i can reasonably pay i&#39;m gonna have to pay it over time maybe or i can get some financing etc the parties connect maybe it&#39;s um you know they&#39;re the parties the buyer and seller are introduced by a common friend a third party who knows them both maybe they use business brokers which business brokers they&#39;re like real estate brokers who specialize in um helping buyers and sellers connect and helping facilitate these purchases and sales i work with a number of business brokers in my practice because they you know they are well established in the community they can find buyers they can find sellers they help facilitate the transaction get the documents done get the deal done they bring me as an attorney and to make sure that either the buyer the seller is well represented and then there you have it but no matter how they connect you got to come to some kind of a meeting of the minds do you have to do that at the beginning i cannot emphasize that enough because i&#39;ve had people i&#39;ve had clients who say well we don&#39;t really have a firm deal yet but we want to get started on the process and then we&#39;ll figure it out as we go um spoiler alert they don&#39;t figure it out as they go they get to some critical stage in the purchase agreement process and then realize oh we really don&#39;t have the meeting of the mines they&#39;re not going to pay what i want them to pay or the seller isn&#39;t going to sell for what i want them to sell it for so now i have to walk away having spent all that money if you can&#39;t come to an agreement in principle without getting further into the process there&#39;s a bit of a concern there and like i said sometimes the agreement doesn&#39;t involve a set purchase price maybe due diligence needs to happen but there should be some parameters that you&#39;ve reached before moving forward um so you&#39;re at this stage um if discussions progress far enough what often happens is the buyer has to sign a non-disclosure agreement saying okay before i can really make a real offer to buy this business i need to see some basic financials i need to know what this company really brings in i don&#39;t even need to deep dive at this stage but i need to know what this company is really bringing in what it&#39;s pro basic profitability is so you sign a non-disclosure agreement as the buyer then the seller discloses that the buyer looks it over usually with the assistance of their accountant or cpa and then the buyer makes an offer if the seller is in agreement on that basic offer you have like i said basic meeting of the minds uh once you have that basic meeting of the minds you go to the letter of intent stage um the letter of intent it&#39;s it&#39;s not really a binding document usually i mean it might have some binding provisions like again non-disclosure confidentiality exclusivity is a common binding provision saying okay the seller will not try and sell to anyone else while buyer is exploring this purchase that&#39;s a common binding provision of the letter of intent but otherwise it&#39;s non-binding it doesn&#39;t commit the buyer or the seller to move forward with the transaction if they later realize it&#39;s not in their interests so the letter of intent should have at a minimum what&#39;s being purchased again stock or asset purchase what the purchase price is or how it&#39;ll be determined again if it&#39;s not set then what&#39;s the formula or metric for it and what are the parties going to be expected to do in loose terms post-closing will the seller be expected to stay on as an employee will they have to train the buyer and their management team throw that into the letter of intent once the parties are on the same page you know once they&#39;re in agreement on it and once they they&#39;ve looked it over they&#39;re comfortable maybe they&#39;ve had their attorneys look it over again get the attorneys and the team involved earlier rather than later so you don&#39;t have to go back and renegotiate the letter of intent but once everyone is comfortable with it they sign it you sign the letter of intent [Music] and then that kicks off a number of processes that run simultaneously in most cases most letters of intent themselves create the due diligence process some don&#39;t and we&#39;ll talk about that in a second some um will defer to the purchase agreement and some daring and bold buyers won&#39;t even insist on a due diligence process they&#39;re just going to buy the business kind of site unseen but by and large the letter of intent will establish a due diligence process which is basically a deep dive for view of the company&#39;s financial records history performance and general status includes tax returns profit and loss statements the books the records instances of employee discipline or employee claims workers comp claims etc i mean due diligence is the opportunity for the buyer to really take a good look at what they&#39;re buying before they move forward i cannot recommend enough taking due diligence seriously and actually making an effort to get what you need because if you&#39;re afforded a due diligence opportunity in the letter of intent and the purchase agreement and whatnot and you don&#39;t take advantage of it you don&#39;t look at anything and then you buy the business the purchase agreement is going to have a little clause that says the buyer has had ample opportunity to do due diligence they&#39;re satisfied with the due diligence and they&#39;re buying the business as is now that&#39;s not to say that the seller can get off scott free if for example they have a bunch of unpaid taxes or a bunch of un unknown claims that come out of the woodwork there&#39;s separate provisions of the purchase agreement that would typically say okay if there are these sorts of issues the seller is going to have to indemnify the buyer for you know these issues but um at the same time you don&#39;t want to be the buyer in that situation going in front of the court and saying your honor i really didn&#39;t know what i was buying despite having the opportunity to check and look i just didn&#39;t know because i didn&#39;t take advantage of it courts aren&#39;t really going to look favorably on that so due diligence is an important process so in terms of due diligence um except get your accountants on board they can usually recommend what you should ask for i know we&#39;ve got a list when we help with due diligence there&#39;s a laundry list of things that we&#39;ll ask for just as a matter of course make sure you get that done once you get past the loi stage the other thing you start doing at the same time is due diligence once you get past the letter of intent stage you move into the purchase agreement and other documents this is the binding contract the purchase agreement and the related documents the bill of sale if there&#39;s seller financing involved where the buyer is going to pay the seller over time for the purchase price you&#39;d have a promissory note you&#39;d probably have a security agreement to secure the the seller finance loan against the assets of the company that&#39;s being purchased things like that but you start working on these in earnest usually while due diligence is happening um sometimes if you have a lot of time to play with here you&#39;ll wait until after due diligence to begin negotiating these documents but more often than not you&#39;re going to be doing them at the same time partly because most buyers don&#39;t want to wait that long to buy the business partly because most sellers don&#39;t want to wait that long to sell it you also don&#39;t want to have to have the seller maintain the status quo where they&#39;re keeping the business of flow without changing it you don&#39;t want to risk changing conditions after due diligence is completed there&#39;s a number of reasons why you do these things simultaneously so you do the purchase agreement and the other documents and i can&#39;t emphasize this enough this is the last chance the last on-ramp to have an attorney join you in making this deal what you want it to be because once you sign the purchase agreement and the other binding contracts you typically can&#39;t change them without the consent of the other party so if there&#39;s something in there that&#39;s unfavorable to you that maybe you don&#39;t understand or you didn&#39;t catch this is where you have an attorney who&#39;s there to represent your interests who will look at the agreement and say no this doesn&#39;t actually line up with what we agreed to this isn&#39;t going to work for my client we need to fix it you know i had someone i mentioned the napkin thing i had someone come into the office last week who bought a business for 450 000 ish give or take um with something that amounted to a napkin contract uh like a one-page purchase agreement that was so riddled with errors and inconsistencies that i really don&#39;t know how it would be enforced if it went in front of a court you know one of the good maxims of contract drafting is it needs to be enforceable but also needs to be predictable you need to be able to look at the thing and have some degree of certainty where you know if one party violated their obligations and didn&#39;t come through you&#39;d want to know with some certainty what would happen there and with those fly-by-night contracts you know the templates that are pulled off the internet that are two or three pages and then the parties just kind of fill in some blanks or change the things the biggest problem i see with them isn&#39;t even that they don&#39;t accomplish a sale because they&#39;ll accomplish a sale most of the time but you never really know what&#39;s going to happen after the fact because they don&#39;t contain the obligations of the parties um they might be riddled with errors that prevent it&#39;s being enforced a lot of different things can go wrong there so this is your last chance to get an attorney involved proactively anything you do after this stage after the signing is going to be reactive if there&#39;s some problem with the agreement you didn&#39;t catch and you need to hire an attorney it&#39;s reacting to the problem and maybe you can fix it maybe you can&#39;t but like i said um use your resources that are available to you at this stage if not well before it so after this stage you move on to continuing due diligence and i say this because a lot of purchase agreements themselves will provide their own due diligence period unless the loi did you know if the loi gave you two months of due diligence for example or one month and then you negotiate the purchase agreement you just close right after signing that&#39;s pretty normal but if the letter of intent didn&#39;t have a due diligence clause often what happens is the parties say we&#39;re going to wait until we do the purchase agreement and the purchase agreement will have due diligence in it and then a closing sometime after due diligence is done in which case cool um the purchase agreement needs to have a provision where the buyer can walk away i saw this once where the the seller tried to pull one over on the buyer by having a due diligence period and then closing right after it but there was literally no way in the contract for the buyer to walk away if due diligence turned up something bad turn up a red flag so the buyer did the due diligence they you know they they saw all these problems and the seller was like well that&#39;s too bad you can&#39;t really walk away from this and it was a whole dispute i don&#39;t remember how that ended it was a few years ago but the point is don&#39;t um you know if you&#39;re gonna do due diligence this way make sure the purchase agreement lets the buyer walk away because the purchase agreement is binding whereas a letter of intent isn&#39;t so things to keep in mind after all that all of that is said and done you move on to closing closing is where everyone you know the the deal is done the deliverables are handed off the purchase price the bill of sale etc the business changes hands from the seller to the buyer money starts moving from the buyer to the seller if not all at once then according to whatever financing terms are in place closing can happen i mean you can get flexible with the closing date so it um it can be a bit of a moving target especially if there are contingencies beyond the party&#39;s control an example of that is things that the secretary of state needs to do where tax and rev needs to do things landlords need to do assignments of leases assignments of contracts etc so if you know there are these contingencies it&#39;s important to give the parties flexibility to set the closing date as soon as the contingencies are met you know i&#39;ve seen deals almost fail actually i saw one fail because there was a closing date that was fixed couldn&#39;t be moved the party started getting into disagreements after signing the purchase agreement and when closing didn&#39;t happen on time because the purchase agreement set the closing date and the contingencies prevented it um one of the parties said okay the deal has failed and they walked away so flexibility here is important post-closing transition this is the part of the deal where um you know the parties are doing what they said they would do afterwards if the seller is staying on as an employee they stay on as an employee maybe they&#39;re training the buyers their management team etc this is also where a lot of property gets retitled or repeated for example a real property commercial buildings etc will need to get repeated if they were owned by the seller and this is an asset purchase so you need to record the deeds which usually happens right after closing same with cars you need to go to the mvd and do the titles for those there&#39;s a lot of little mechanical things handoff of bank accounts something as simple as handing off the keys the security alarm accounts payroll accounts things like that changing the names on all these accounts so it can be a process that happens after closing and you need to plan for that and have a good sense of what needs to be done before closing that way once closing happens you can just start doing it one after the other after the other the one thing you really don&#39;t want to do is drag this out too long because then you might get to a point six months down the road where you realize oh i never got my name substituted on this particular bank account or something and the seller is either gone maybe the relationship is broken down with the seller you never know but you really don&#39;t want to be in a position where you&#39;re still asking the seller for these sorts of things you know months or years down the road now i&#39;m really quick going to go over some of the documents that you&#39;ll need for this sale and then i&#39;m going to jump into the negotiating strategies and some useful info for you [Music] so a non-exhaustive list and i say that because again these deals can look very different depending on the buyer the seller the agreement but some basic things you&#39;ll need a stock purchase agreement or asset purchase agreement depending on the nature of the sale a bill of sale the bill of sale is just the document that legally transfers the assets that can be transferred that way you know stock purchase agreement or an asset purchase agreement says so-and-so agrees to transfer the assets it&#39;s an agreement to do something the bill of sale says so and so does hereby on this date transfer the assets so the bill of sale it&#39;s often overlooked but it&#39;s very necessary because without it all you have is an agreement to transfer the assets there&#39;s nothing legally doing it in the moment so you&#39;ve got the bill of sale you&#39;ve got if there&#39;s seller financing you know if the seller says okay you the buyer can pay me over a period of months or years or whatnot you need a promissory note that&#39;s just the basic debt instrument to evidence the the debt owed by the buyer to the seller uh promissory notes they&#39;re ubiquitous you might not even know you&#39;ve signed them but you know a certain debt um car loans for example are always backed by a promissory note uh when you buy a house with a mortgage there&#39;s a promise or a note that&#39;s a part of that mortgage so it&#39;s just a simple debt instrument but with that simple debt instrument comes the question are you going to collateralize it is there something that&#39;s going to secure this debt so if the buyer stops paying you the seller have some recourse against specific assets if the answer is yes and very commonly is you have what&#39;s called a security agreement sometimes the security agreement is baked into the promissory note as a section of it sometimes it&#39;s a separate document i&#39;ve done them both ways depending on what my clients want but it spells out specific assets they&#39;re going to be used to protect the seller&#39;s interest it can be generalized as you know all assets of the company etc etc but it spells out what&#39;s going to be used as collateral after that assuming you&#39;re going to do that you pair that with [Music] the other documents needed to perfect those security interests and i&#39;ll give you some examples here if you&#39;re taking an interest in the assets generally of the company think equipment inventory etc assets other than vehicles real property depository accounts bank accounts etc you perfect those by filing what&#39;s called a ucc one financing statement you file that with the ucc department up in santa fe you can do it online it&#39;s pretty straightforward and simple but you prepare that and then you record it and that recorded financing statement lets any other potential creditor know that you already have a security interest in these assets so it fixes your place in line if someone else lends to the buyer uh with an interest in the assets they&#39;re behind you in priority assuming you perfect your security interests same with um real property you know if you&#39;re selling a company that has a commercial building and the buyer is going to pay you over time and you want a security interest in that real property you need a mortgage against it and you need to record that mortgage with the county clerk of the county in which the property resides that is how you perfect your security interest in real property so you do that and then any would-be creditors on notice that you already have a security interest in that property and it prevents the the the buyer of your company from turning around and selling that property you know if they sell it is subject to a mortgage you have first rates as a secured party so it&#39;s really important to do all these little things these are little things that get overlooked pretty commonly but when you overlook them [Music] things fall through and then if for example the buyer stops paying if you didn&#39;t perfect your security interest or if you don&#39;t even have them you might have no recourse you might not be able to go and collect what you&#39;re owed as part of the purchase price so you know i&#39;ll talk about this later as a strategy but make sure you&#39;re doing you&#39;re dotting your eyes and crossing your t&#39;s to protect yourself as the seller in this scenario finally you&#39;ve got things like non-compete non-solicitation agreements so that the seller can&#39;t turn around and compete with the business that you sold you&#39;ve got the post post closing services agreement if the seller is going to stay on as an employee or as a contractor you&#39;ve got corporate resolutions authorizing transactions these are just basic internal documents the sort of again dotting your eyes and crushing your tees things and then last you&#39;ve got the operating agreement for llc&#39;s or bylaws and shareholders agreement for corporations these are just the governing documents of the company that will provide for how things are going to happen going forward voting transfer of ownership interests etc etc you&#39;d want to make sure that you you as the buyer have those in place moving forward after the purchase so some negotiating strategies and useful info uh this is stuff where you know as you&#39;re going forward in the process you really want to keep it in mind and make sure that you&#39;re not overlooking something you should be doing um strategy one and this is something i covered in the beginning of the presentation but it&#39;s worth reiterating um negotiations aren&#39;t an all or nothing endeavor at least they don&#39;t have to be unless you want them to be there are some things where you might draw a line in the sand and say okay i&#39;m not willing to accept less than this is the purchase price or i&#39;m not willing to do a stock purchase instead of an asset purchase there are some things where maybe you know your priorities require that and that&#39;s fine but you really have to look at what your red lines are and if something isn&#39;t critically important to you maybe don&#39;t make it into an all or nothing conflict and this is again where we get into litigation versus transactional attorneys every single thing when a litigation attorney tries to negotiate these sorts of deals becomes an all-or-nothing decision or proposition there are win-win situations to be had if you get creative with the deal so i&#39;d really encourage you where possible to figure out ways where you can benefit and the other party can benefit is possible in a lot of cases so that&#39;s my first strategy recommendation right there is be creative be flexible figure out what&#39;s going to get you the maximum benefit possible while also benefiting the other party and there are definitely ways to do that again hire a transactional attorney um it&#39;s i harp on this because again i just had a deal fall through because someone hired a family friend who&#39;s a litigation attorney who did everything humanly possible to torpedo the transaction so it these sorts of things matter if you actually want to get your deal done and it&#39;s not just transactional attorneys you see the help tip at the bottom having a good accountant or cpa is immensely helpful when you&#39;re doing the due diligence when you&#39;re figuring out the tax consequences to you in the purchase or sale i mean they&#39;re the numbers people they&#39;re the people who do the math to make sure that you have an understanding of what the consequences of the transaction good and bad will be so the earlier you get those folks involved the easier your transaction is going to be just easy rule strategy number three hope for the best but plan for the worst there is no surefire way to guarantee the performance of the other party in the sale um it&#39;s just the honest truth i can make the best darn purchase and sale agreement you have ever seen with all of the other documents that you might possibly want and need and that&#39;s not going to guarantee that the other party doesn&#39;t flake out doesn&#39;t disappear into the wind i mean you see it often with sellers who throw up their hands and um you know they take the as much of the purchase price as they get whether that&#39;s 100 up front or whether that&#39;s you know some percentage up front and then they disappear into the wind and then the buyer finds out that uh what they bought you know they bought a lemon they bought a company that&#39;s riddled with tax debt they bought a company that is um [Music] uh you know riddled with other potential claims maybe there&#39;s uh the threat of a lawsuit that the seller knew about but didn&#39;t disclose to the buyer and then the sale happened and then the buyer gets sued the seller says well that&#39;s your problem and they disappear in the wind and move to uh belize that&#39;s a real example that happened a few years ago um there&#39;s no surefire way to guarantee the performance of the other party so what i tell people even though you can&#39;t do that there are very important and usually easy ways to mitigate the risk of non-performance or mitigate the risk of issues that might crop up so for example you know if you&#39;re the buyer of the company and you&#39;re not absolutely certain that there are um tax debts outstanding like if you&#39;re not absolutely certain that the seller has paid their taxes and that&#39;s income taxes gross receipts taxes and especially payroll taxes if you&#39;re not confident that all of those have been paid properly um you can negotiate a hold back from the purchase price in fact new mexico law provides for that hold back statute 7 161 specifically for gross receipts it provides that you know the buyer of a business is liable for the gross receipt tax debt of the seller as was called a successor in business but the buyer can request a tax clearance certificate from the state that says there are no taxes owed the state is notoriously slow at getting those out but the buyer can also hold back a part of the purchase price that would otherwise get paid to seller to cover some theoretical tax debt that might crop up in the future i use holdbacks all the time for this sort of thing so you know those are the sorts of options you might have and again having good enforceable indemnification agreements as against the seller having security interests and assets if you&#39;re the seller helps so that you know if the buyer does something underhanded tries to sell out all the assets you transfer them and then close up shop and start something new and stop paying the seller etc there are ways to protect yourself and so consult with your professionals your attorneys and otherwise and do the little things that might seem pointless especially if you&#39;re comfortable with the other party i mean i know a lot of the times the buyer and seller know each other they say oh they&#39;ll never cheat me and i get that and i&#39;m not gonna say oh so-and-so could well cheat you but i will say is prepare for the possibility it never hurts to do the little things to protect your interests and on that note trust but verify i know i&#39;m pulling that right out of the 80s but it works as a saying here because again you have the opportunity with due diligence to do exactly that you have the opportunity to look at everything and have your cpa or accountant or lawyer look at it with you and then again make sure that you have the ability to walk away if you turn up red flags if you turn up something that clearly wasn&#39;t disclosed that you didn&#39;t know about that&#39;s going to impact the value of what you&#39;re buying or make it too too much of a high risk proposition due diligence is your friend so make sure as the buyer that you&#39;re doing due diligence and then strategy number five and i&#39;ve talked about this already security&#39;s worth a thousand notes um you have a thousand promissory notes which promises you money but security interest in the assets gives you something real something material to go after if the buyer stops paying um so make sure that you&#39;re getting those security interests make sure you&#39;re recording them and perfecting them so that you can go after the assets and so that you don&#39;t get booted by other creditors who come later if you don&#39;t perfect your security interest in the assets some other creditor might come along and do exactly that in which case you are now behind that creditor in line you know that creditor gets paid first before you do so do the things secure your interests uh it will pay dividends later if things fall through with the buyer and lastly and this is just very general utilize your resources every business business owner situation is unique it&#39;s important to work with the knowledgeable professionals who can represent your interests and help you through the transaction again sbdc nmsbdc.org reach out to your local new mexico small business development center liaison go to the website uh set up a no-cost business counseling session i mean they are a great resource that&#39;s no cost to you that can help you start moving in the right direction based on what your interests and priorities are they have a great network of resources and contacts in the state of new mexico if they can&#39;t help you they can point you in the right direction someone who can so really that&#39;s a great resource to avail yourself of and then by and large just make sure you&#39;re using your resources throughout the process so final thoughts the one thing i didn&#39;t really cover here that uh is worth considering is that when you&#39;re buying a business especially you can get really creative about how you structure the purchase especially if you&#39;re doing an asset purchase but you know through the use of holding companies and clever use of taxation strategies where you&#39;re you know maybe making an s corp designation for your holding company or things like that i mean there are ways when you buy a business to go beyond just the basic purchase to really optimize the entire process moving forward for tax purposes so it&#39;s that&#39;s another consideration to really make is you know especially if you have more than one business or if you&#39;re expanding or doing something like that how can i make this work for me in a larger sense even after the purchase and so again use your resources your a tax account into your cpa consult with them to figure out what the best tax strategy is for you because um you know in your hands moving forward you can take a business that was already profitable and make it more profitable you can take a business that was struggling and maybe make it profitable it&#39;s all about having the good plan in place ahead of time you

Transcript for:Buying and Selling Your Business - Keys to Success

Transcript for:
Buying and Selling Your Business - Keys to Success