Thinking about buying or selling a business in Massachusetts? The process of business acquisitions and sales is both exciting and daunting. 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 your business’s value is a crucial first step when preparing to sell. Several factors need to be taken into account, such as financial records, assets, liabilities, market trends, customer base, and growth potential. Hiring a professional business appraiser or certified public accountant can provide an accurate valuation. These experts will review your financials, evaluate market conditions, and apply industry-specific multiples to generate a realistic value range. Knowing your business’s worth helps you set an appropriate asking price and gives you the leverage to negotiate successfully during the sale.
What is an Asset Purchase vs. a Purchase Sale Agreement?
When it comes to buying or selling a business, there are two main types of transactions: asset purchases and purchase sales. Understanding the difference between these two options is crucial for both buyers and sellers.
In an asset purchase, the seller maintains ownership of the legal entity, while the buyer acquires specific assets of the business. These assets may include equipment, fixtures, lease agreements, licenses, goodwill, trade secrets, trade names, phone numbers, and inventory. It is important to note that cash is typically excluded from asset sales, and the seller usually retains responsibility for any long-term debt. However, asset sales can present challenges, particularly when it comes to transferring certain assets like intellectual property, contracts, leases, and permits. These issues often involve questions of assignability, legal ownership, and the need for third-party approvals. For instance, obtaining consents or reapplying for permits can lead to delays in the transaction process.
In a purchase sale, the buyer purchases the shares of selling shareholders and the assets, thereby taking ownership of the entire legal entity. Unlike an asset sale, where each asset must be transferred individually, a stock sale involves transferring ownership of all assets within the corporation. Sellers often favor purchase sales because they allow them to sell the entire business, including both current and future liabilities. Buyers, however, may be hesitant to pursue a stock sale for the same reason, as they inherit the company’s liabilities. In general, stock sales tend to be quicker and less costly than asset sales, as the business is valued and sold as a whole.
Due Diligence
When selling a business, conducting thorough due diligence is crucial to give potential buyers a clear picture of your company’s operations, financial health, and legal standing. This transparency helps mitigate risks and build trust. As a seller, being prepared for financial, legal, operational, and industry-specific due diligence can help streamline the process and improve the chances of a successful sale
Financial due diligence includes a review of financial statements, cash flow, assets, liabilities, and tax records. Legal due diligence involves providing corporate documents, property details, contracts, and disclosing any ongoing or potential legal issues.
Provisions in the Purchase Agreement
There is a specific legal process that both buyers and sellers must follow to ensure a smooth transaction. The process being with a Letter of Intent (LOI), a document outlining the intentions of both parties to enter into a business deal. The LOI highlights the key terms of the proposed transaction and serves as a foundation for drafting the formal purchase agreement.
A typical business purchase agreement includes several standard provisions, including:
- Identification of the parties
- Date of sale/transfer
- 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)
- Any other continuing employment agreements with owner of Seller
Conclusion
Buying or selling a business in Massachusetts 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 to help you through the process can ensure a smooth and successful transaction. Contact a member of the Romano Law team today.
Contribution to this blog by Michael Tuoma.
