In the latest Weekly Wright Report:
Buying and Selling a Business
One of the American dreams is owning your own business. From the very start of our nation’s history, small businesses helped establish and support the national economy.
Like anything worth having, buying or selling a business requires time, effort and an investment in hiring professionals who make sure the process is completed accurately.
Your first task is to find an accountant who comes highly recommended. It’s wise to hire a certified public accountant (CPA) versus an accountant. CPAs have extensive training and are regulated by the state, which means they’re constantly updated on the latest laws, including taxes.
The CPA’s primary job is to review the financial records of the company you wish to buy. He or she will present you with findings that show how much the company is worth, the amount of debt it currently holds and any financial irregularities that could pose problems.
Once you have decided on the right CPA, it’s time to direct your attention towards hiring a competent attorney. In the case of a transaction such as this, an attorney serves a great many purposes.
One of the first tasks for your attorney will be to prepare or review transaction documents such as the asset purchase agreement. An attorney will also conduct “due diligence” and investigate the business to ensure there are no liens on the business and that all the legal requirements have been met.
Due diligence is crucial because it ensures you won’t be inheriting any legal hassles after you’ve taken over the business.
Your lawyer will review the target business’s existing agreements and contracts with vendors and clients. In addition, the insurance policies and any licenses or permits will be reviewed. If the target business owns any intellectual property, your lawyer may check on the status of patents and trademarks to ensure they can be transferred over to the new owner.
Finally, and perhaps most importantly, your lawyer will discover any ongoing litigation that may involve the target business. You don’t want to become tangled up in a lawsuit that you didn’t know about!
In addition to due diligence, your lawyer will also help you with the actual purchase of the business. There are two general ways a business is purchased, a stock purchase (or LLC Membership Interest Purchase) or an asset purchase. A merger is a third way but usually occurs between large businesses.
In a stock or LLC Membership purchase, the buyer purchases a majority or all of the stock or LLC Membership Interest held by the seller. Unless excluded by the stock purchase agreement (or LLC operating agreement), the purchaser is assuming the liabilities of the seller in addition to obtaining ownership of the target company and its assets. Once this is complete, the buyer is now the new owner of the business and is free to proceed however he or she chooses.
In an asset purchase, the buyer purchases all of the assets of the seller’s business. Money is exchanged and then the business becomes yours, as do its assets. For example, you purchase a restaurant – you not only take over the building (as the tenant), you also become the owner of assets like the good will of the business, the cooking equipment, tables, chairs, and so on.
Purchasing a business represents an excellent opportunity to work for yourself. It’s wise to hire professionals like a CPA and an attorney to ensure a smooth, hassle-free transaction. If you have any questions, please contact Neil Lanzi, at Wright, Constable & Skeen, LLP, (410) 659-1390 or nlanzi@wcslaw.com.