Thinking about buying or selling a business in New York? The process of business acquisitions and sales is both thrilling and complex. Whether you are a seasoned entrepreneur or embarking on a new venture, mastering the intricacies can make all the difference in a successful transaction.
Looking to Sell your Business? First, Determine its Value.
Determining the value of your business is an essential first step when preparing to sell. Various factors should be considered, including financial statements, assets, liabilities, market conditions, customer base and growth potential. Engaging the services of a professional business appraiser or a certified public accountant can help you obtain an accurate assessment of your business’s value. They will analyze your financial records, assess market trends and consider industry-specific multiples to provide you with an estimated value range. Understanding the worth of your business allows you to set a realistic asking price and negotiate effectively during the sale.
What Is an Asset Purchase vs. a Stock Sale?
When it comes to buying or selling a company, there are two main types of transactions: asset purchases and stock sales. Understanding the difference between these two options is crucial for both buyers and sellers.
- In an asset purchase, the seller retains ownership of the legal entity, while the buyer purchases specific assets of the company. These assets can include equipment, fixtures, leaseholds, licenses, goodwill, trade secrets, trade names, telephone numbers and inventory. It’s important to note that cash is usually not included in asset sales, and the seller typically keeps any long-term debt obligations. It should be noted that asset sales can come with challenges related to the transfer of certain assets, such as intellectual property, contracts, leases and permits. These challenges often involve issues of assignability, legal ownership and third-party consent. For example, obtaining necessary consents and reapplying for permits can cause delays in the transaction process.
- In a stock sale, the buyer directly purchases the stock of the selling shareholders, which means they acquire ownership of the entire legal entity. Unlike an asset sale, where each individual asset needs to be transferred separately, stock sales involve the transfer of ownership for all assets within the corporation. Generally, sellers prefer stock sales because they sell the entire business including its current and future liabilities. Buyers may object to this type of sale for the same reason – they do not want to accept liability. Stock sales tend to be faster and less expensive in comparison to an asset sale since the business is valued and sold as a whole.
Due Diligence
When selling a business, conducting thorough due diligence is vital to provide potential buyers with a comprehensive understanding of its operations, finances, and legal matters, ensuring transparency and reducing risks. As a seller, being well-prepared for financial, legal, operational and industry-specific due diligence can streamline the sales process and increase the likelihood of a successful transaction.
Financial due diligence involves reviewing financial statements, cash flow, assets, liabilities and tax records. Legal due diligence requires providing corporate documents, property information, contracts and disclosing any legal issues.
Provisions in the Purchase Agreement
There is a specific legal procedure that buyers and sellers must follow for a successful transaction. The process starts with a Letter of Intent (“LOI”), which is a document between two parties who intend to enter into a business transaction with one another. An LOI outlines the chief terms of the prospective business deal and is later used to formalize a purchase agreement.
Business purchase agreements typically include various standardized provisions such as:
- Identification of the parties
- Assets/stocks to be included
- Purchase price and method of payment
- Closing terms or conditions that must be met
- Representations and warranties
- Limits on liabilities assumed by the buyer
- Restrictive covenants (non-competition, non-solicitation, confidentiality/non-disclosure)
Conclusion
Buying or selling a business in New York is a complex endeavor that requires careful planning, thorough analysis and expert guidance. With the nuances of business valuations, different purchase types, due diligence and purchase agreements, having an experienced business attorney help you through the process can ensure a smooth and successful transaction. Contact a member of the Romano Law team today.
Andres Munoz is admitted to practice law in New York and Florida.
Contribution to this blog by Joseph Ford.
