Corporate & Business Law
In today’s complicated and heavily regulated world, it is difficult to operate any size business without consulting a lawyer. When starting a new business, it is important to carefully consider how the business is organized.
Should you incorporate?
Should you operate as a partnership, sole proprietorship or limited liability company?
If you incorporate, then the corporate books must be maintained and updated. How do you respond when you get threatening letters or are sued? If anyone else is involved in the business as an owner, then there ought to be written agreements in advance about how the company will be run and what will happen if one co-owner dies or wants out?
You may have a disagreement with a co-owner. Written contracts are important to documenting agreements with customers. A broken contract may cost you money. Renting a location may involve a complex commercial lease. When customers fail to pay, you may need to file suit for your money. The sale of an ongoing business often involves a complicated agreement and numerous documents, including non-compete agreements. The attorneys of Campione & Hackney, P.A. can help in advising you of these issues and many others.
We can also help you with most litigation related to your business. We have substantial experience litigating shareholder derivative suits, breach of contract, collections, breach of promissory notes, business dissolutions, fraud, non-compete agreements and other commercial disputes.
Purchase or Sale of a Business
For some individuals, buying an existing business represents less of a risk than starting a new business. While the opportunity may be less risky in some aspects, you must perform due diligence to ensure that you are fully aware of the terms of the purchase.
Advantages to Choosing an Existing Business.
There are many favorable aspects to buying an existing business such as drastic reduction in startup costs. You may be able to jump start your cash flow immediately because of existing inventory and receivables.
Disadvantages to Choosing an Existing Business.
There are also some downsides to buying an existing business. Purchasing cost may be much higher than the cost of starting a new business because of the initial business concept, customer base, brand and other fundamental work that has already been done. Also, be aware of hidden problems associated with the business like debts the business is owed that you may not be able to collect.
Considerations.
- Due Diligence . Proper due
diligence is required before starting or purchasing any business to understand what you are buying and getting into. There is no substitute to investigating and doing your homework. - Obtain all Licenses and Permits . Most businesses need licenses and permits to operate. The type of license or permit you need depends on your industry and the location in which the business is located.
- Zoning Requirements : Zoning requirements affect and dictate the type of business that may operate in a particular area.
- Environmental Concerns : If you are acquiring real property along with the business, it is important to check the environmental regulations in the area.
Determining the Value of a Business
There are a number of different methods to determine a fair and equitable price for the sale of the business. Here are a few:
- Capitalized Earning Approach: This method refers to the return on the investment that is expected by an investor.
- Excess Earning Method : Similar to the capitalized earning method, except that it separates return on assets from other earnings.
- Cash Flow Method : This method is typically used when attempting to determine how much of a loan the cash flow of the business will support. The adjusted cash flow is used as a benchmark to measure the firm’s ability to service debt.
- Tangible Assets (Balance Sheet) Method : This method values the business by the tangible assets.
- Value of Specific Intangible Assets Method : This method compares buying a wanted intangible asset versus creating it.
Pre-Contract Steps.
- Research for Purchasing a Business . Once you have found a business that you would like to buy, it is important to conduct a thorough and objective investigation.
- Letter of Intent . The letter of intent should spell out the proposed price, the terms of the purchase and the conditions for the sale of the business.
- Confidentiality Agreement . A confidentiality agreement indicates that you will not use the information about the seller’s business for any purpose other than making the decision to buy it.
- Contracts and Leases . If the business has a current lease for the location, be aware that you may have to work with the landlord to assume any existing lease on the business premises or negotiate a new lease.
- Financial Statements . Examine the financial statements from the business for at least the past three to five years. Also make sure that an audit letter accompanies the statements from a reputable CPA firm. You should not accept a simple financial review by the business itself.
- Tax Returns . Review the business’s tax returns from the past three to five years. This will help you determine the profitability of the business as well as any outstanding tax liability.
- Important Documents . Numerous documents should be checked during your investigation. Examples include property documents, customer lists, sales records, advertising materials, employee and manager information and contracts.
- Professional Help. A qualified attorney should be enlisted to help review the legal and organizational documents of the business you are planning to purchase. Also, an accountant can help with a thorough evaluation of the financial condition of the business.
Sales Agreement for Buying a Business
The sales agreement is the key document to finalize the purchase of the business. This agreement defines everything that you intend to purchase including business assets, customer lists, intellectual property and goodwill.
Checklist for Closing On a Business. The closing is the final step in the process of buying a business. Keep in mind that you should have legal counsel available to review all documentation necessary for the transfer of the business.
The following items should be addressed in a closing:
- Adjusted Purchase Price This will include prorated items such as rent, utilities, and inventory up to the time of closing.
- Review Required Documents These documents should include a corporate resolution approving the sale, evidence that the corporation is in good standing, or any tax releases that may have been promised by the seller.
- Lending . In some cases, the seller or other third party will finance the transaction.
– Loan Documents. Have an attorney review the promissory note and any other loan documentation.
– Security Agreements A security agreement provides terms for real and personal property serving as collateral securing repayment of the loan.
– Perfecting the Lien . Uniform Commercial Code documents are filed with the Secretary of State to perfect the lien on personal property. A mortgage is recorded in the public records of the county the real property is located to perfect the lien on real property.
- Lease : If you agree to take over the lease, make sure that you have the landlord’s concurrence and the lease is current and in good standing. If you are negotiating a new lease with the landlord instead of assuming the existing lease, make sure both parties are in agreement of the terms of the new lease and the lease is signed at the time of closing.
- Vehicles: If the purchase of the business includes vehicles, you may have to complete transfer documents for the vehicles. Check with your local Department of Motor Vehicles to determine the correct procedure and necessary forms.
- Bill of Sale : The bill of sale with warranties evidences the transfer of tangible business
- Patents, Trademarks and Copyrights : If there are any patents, trademarks and/or copyrights associated with the business, you may need to complete the necessary forms as part of the transaction for the transfer of the same.
- Franchise : You may need to complete franchise documents if the business is a franchise.
- Closing or Settlement Sheet The closing or settlement sheet will list all financial aspects of the transaction. Everything listed on the settlement should have been negotiated prior to the closing and be consistent with the terms of the purchase and sale agreement.
- Covenant Not to Compete The seller should sign an agreement not to compete against the business to prevent any interference or competition from the previous owner.
- Consultation/Employment Agreement: If the seller is agreeing to remain on for a specified amount of time, this documentation is necessary for legal purposes.
