FIVE THINGS TO KNOW BEFORE BUYING OR SELLING A BUSINESS
By: Laurance D. Pless
Following are some practical observations about buying or selling a business that every business owner should know before venturing into this often unfamiliar territory.
Step One: Run the Numbers. Tax liabilities vary widely. For example, one deal structure can risk a double tax. And tying payments to certain circumstances could increase the tax rate on them significantly.
“It’s Not Signed Until It’s Signed”. The first document to be agreed upon between buyer and seller is a “letter of intent” or a “term sheet”. They should be expressly nonbinding and serve only to align the parties on basic deal structure and terms. A binding deal should come only in a complete purchase agreement including all attachments.
Buyer Beware. Just like buying a house or car, the law favors those who conduct a careful, thorough “due diligence” exam before buying a business.
Don’t be Penny Wise and Pound Foolish. Deal etiquette is for buyers to draft all purchase documents and sellers to draft all debt documents (like notes and security agreements). Buyers sometimes, in an effort to save fees, let sellers draft purchase documents, only to learn that the fees saved are far outweighed by unfavorable language that cannot be dislodged.
Separating the Good from the Bad. Fundamentally, acquisitions take the form of either a stock sale or an asset sale. A seller receives either cash or stock, or some combination. If you don’t carefully select the structure, you could end up with a surprise, for example, in who ends up with hidden liabilities.
The above is just a sampling and not a complete list, as there are other points to consider.
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