Buying or Selling a Business

Legal and Practical Issues

Buying or selling a business is an important transaction, and proper guidance is recommended.  This summary is provided as a checklist regarding some of the principal issues involved in buying or selling a business, but it is not intended to be a substitute for legal advice.  Further, this summary is not intended to address all issues that should be considered. Since many of our clients are foreign nationals buying businesses for visa purposes, this summary incorporates comments specifically applicable to such purchases.

Our View of the Attorney’s Role

We frequently represent clients in business purchases or sales. Most of the transactions are asset purchases, although we occasionally are involved in stock purchases as well. Our role in the transaction is basically to assist our client in achieving his or her objective, while being fully aware of the legal issues involved in the transaction.  As indicated below, the objectives of Buyer and Seller are quite different, and our role differs depending upon the transaction.

Buying a Business

Preliminary Considerations:  For a Buyer, the main goal is to acquire the business free and clear of all liens and other encumbrances, and to be able to replicate or improve the performance of the Seller.

If the business is being purchased in order to obtain a visa, there are special considerations. No offer to purchase a business should be made without first consulting with an immigration attorney to make sure that the offer is structured in such a manner that it will comply with the visa requirements. A business attorney should also be involved in order to draft the purchase agreement to ensure that all issues are properly addressed.

Any Buyer acquiring a service business should realize that the business assets may consist primarily of goodwill and going-concern value, rather than tangible assets.

The Buyer should determine whether there are any special licenses required to operate the business. For example: a pest control business requires a special license issued by the State, and it can be quite time consuming to obtain such a license. If a special license is required, the Buyer would want to make sure that arrangements are made with the Seller or an employee who is properly licensed to remain with the business until the Buyer may become licensed.

In order to minimize liability, the acquisition should be made in the form of a corporation or other entity. If the purchase agreement is signed before the entity is formed, the purchase agreement should be prepared so that it may be assigned to an entity prior to closing.

For some transactions, it is preferable to enter into a non-binding letter of intent with the Seller prior to submitting a binding purchase agreement.  The purpose of the letter of intent is to ensure that the parties agree on all of the major points of the transactions.  In that manner, if there is a problem the Buyer has not incurred the cost of preparation of the purchase agreement.  However, the letter of intent should not be a binding purchase agreement, since it will not include sufficient details of the transaction.

It is sometimes suggested that an attorney serve as a closing agent without representing either party, but with each party paying one-half of the attorney's fees.  Since the Buyer and Seller have adverse interests, the preparation of closing documents common to most transactions will, by necessity, favor one party or the other, and therefore severely restrict the ability of a Florida attorney to serve in such a capacity. In the vast majority of transactions, a Florida attorney may not ethically serve simply as a closing agent without representing either party.

It is our opinion that contracts typically used by business brokers do not adequately protect the buyer, and typically omit many of the necessary representations and warranties that should be provided by the seller and the seller’s owners.

Purchase Agreement Issues:
It is customary for the Buyer to prepare the purchase agreement and submit it to the Seller. The Buyer could be at a significant disadvantage if the Seller prepares the purchase agreement.

If the business is being purchased to qualify for a visa, the purchase agreement must include a properly drafted visa contingency clause.  A visa contingency clause is critical to any purchase agreement, but is frequently omitted or improperly drafted.  The contingency clause should be drafted in consultation with the immigration attorney in order to insure that the proper terminology is used.

In those cases where a visa is required, the closing of the transaction will be inevitably delayed.  For that reason, the Buyer should understand that a Seller may resist the inclusion of a visa contingency clause.  Nevertheless, the Buyer generally should insist on a reasonable period of time to obtain the visa, and the right to terminate the agreement without liability if the visa is not granted.  Of course, the Buyer's immigration attorney should provide advice as to what is reasonable.

Since a typical visa contingency clause usually provides for the Buyer to be refunded the deposit if the visa is not granted, the Seller may feel insecure about the transaction. In some cases it may be necessary for the Buyer to agree to forfeit all or a portion of the deposit if the visa is not granted within a specified period of time. We usually provide that the Buyer can extend the visa contingency period (and the closing date) by giving notice to the Seller, at which point a portion of the deposit becomes non-refundable.  This approach minimizes the risk that the deal will fall through if there is an unanticipated delay in visa approval.

The most common visas involved in business purchases are the E-2 (treaty investor visa) and the L-1 (intra-company transfer). To qualify for the E-2 visa, the Buyer must be a resident of a country with which the US has an immigration treaty, and the Buyer must make a “substantial investment” in a US business.  The E-2 does not lead to a green card. On the other hand, the L-1 visa approach does not have the treaty requirement, and it can ultimately lead to a green card. There is a requirement that there be an active company in the home country. Essentially, the parent company transfers the applicant to the US. to run the US company. Unfortunately, the home company must continue operating in a substantive manner. After the L-1 visa has been renewed, it is common for the visa holder to petition for a green card.

There should be an inspection period, which is typically in the 15 to 30 day range.  During this inspection period, the Buyer conducts the due diligence, such as reviewing the books and records, inspecting the financial data and tax returns, reviewing contracts and discussing the business with the Seller.   In many cases, the Buyer will want to terminate the purchase agreement for any reason during the inspection period, although some Sellers will insist that the right to terminate be restricted.

The deposit should be fully refundable, at least through the end of the inspection period.  The deposit should not be given directly to the Seller, but should be deposited with an attorney or broker.

The Buyer should determine whether there are any written contracts, and if so whether they may be cancelled and whether they may be assigned.  Depending on the type of business, the contracts may be very important.  For visa purposes, it has become critical that the Buyer be able to demonstrate that the customers have consented to the assignment of the Seller’s contracts.  Also, the contracts should be in writing.

The Buyer should understand that it is virtually impossible to be fully protected against sales tax liabilities of the Seller. This is due to the fact that Florida law basically places the burden upon the Buyer to determine that the Seller has paid its sales taxes. This is less important for businesses that solely provide services.

A portion of the purchase price is frequently held in escrow for 90 to 120 days.  This approach gives the Buyer an opportunity to determine whether there have been any breaches of any representations or warranties made by the Seller, particularly with regard to liabilities that affect the Buyer. Typically, there is a separate escrow agreement that specifies how the escrow funds may be applied and ultimately disbursed to the Seller. Usually, the greatest risk to the Buyer will be the Seller’s sales tax liability.

It may be advisable to obtain some amount of financing from the Seller. By having a payment obligation to the Seller and by including a right of set-off in the event of a breach or default by the Seller, the Buyer will be able to apply any damages suffered against the amount otherwise owed to the Seller.

Some Buyers should consider making a portion of the purchase price contingent upon meeting certain sales or revenue benchmarks or goals during the first year after the purchase. This is especially true if the Buyer is substantially relying upon the past performance of the Seller.

The purchase agreement should require the Seller to provide key financial information and documents within 5 days after the effective date of the purchase agreement, and if the documents are not provided by that date, the effective date should be delayed. This is important due to the fact that the inspection period typically begins with the effective date, and this approach will prevent the Seller from being able to effectively shorten the inspection period by not providing the critical information on a timely basis.

There should be a period of time during which the Seller trains the Buyer.  Typically, this is in the 15 to 30 day range, and normally no separate compensation is required. However, it may be advisable to have the Seller remain as an employee or consultant for a longer period of time. If so, separate compensation for those services would normally be provided, and an employment agreement or consulting agreement should be included with the purchase agreement. If there is an employee of the Seller who is critical to the success of the business, the purchase agreement should also be contingent upon entering into an employment agreement with that employee for a reasonable period of time.

The purchase agreement should include a properly drafted non-competition clause in order to prevent the Seller, its officers, directors and shareholders from competing with the business following the sale. A five-year non-competition period is common, while the geographic area for the non-competition will depend substantially on the type of business.

If the Seller is a corporation or other entity, the Seller's owners should personally guarantee the purchase agreement. This is important due to the fact that the selling entity will frequently dissolve following the transaction.

In most situations, the purchase agreement should require the Seller, if a corporation or other entity, to change its name in order to eliminate confusion with the Buyer after the transaction.

The purchase agreement should allocate the purchase price among the various assets, preferably before being signed by the parties. Otherwise, disputes frequently arise at or near closing as the parties become aware of the tax ramifications of the allocation.

A full and complete list of representations and warranties should be obtained from the Seller and its owners.

Due Diligence: The Buyer should obtain a judgment and lien search at both state and county levels. If the Seller is an entity, the searches should be obtained on both the entity and its owners. It is important to keep in mind that it is virtually impossible to have a completely up-to-date search as of closing, due to the time lag. It is generally advisable to do an informal internet search at the beginning of the purchase agreement process, and obtain an independent judgment and lien search just before closing.

The Buyer's certified public accountant should review the Seller's tax returns and financial statements, and possibly compare them to the bank statements. If the business involves the sale of products subject to sales taxes, the sales tax returns should be reviewed and reconciled to the income tax returns.

Prior to closing, the Seller should provide to the Buyer a statement from the Florida Department of Revenue that no taxes are owed.  However, the Buyer should realize that such a statement would only mean that the taxes shown on the filed tax returns have been paid.  Upon the sale of a business, the Florida Department of Revenue may audit a multi-year period prior to the sale, and the Buyer would be liable for the taxes if the Seller does not pay them.

During the inspection period, the Buyer should obtain documentation to support the representations of the Seller.  This is a critical part of the Buyer's due diligence.

Closing Documents: The Buyer's attorney should prepare the bill of sale, employment and/or consulting agreement and closing statement. The closing documents should include the judgment and lien search documents, uniform commercial code searches, etc.

If the Seller is providing any financing to the Buyer, the Seller's attorney will typically prepare a promissory note, security agreement, Form UCC-1, etc.  However, the Buyer's attorney should review those documents to insure that they are reasonable.

Selling a Business

Preliminary Considerations: While a Buyer's main concern is obtaining the business it thinks it is buying, the Seller simply wants to get paid.  A secondary consideration for the Seller is that it not be required to make unreasonable or inappropriate representations and warranties, which increase the possibility of future problems. However, the Seller generally knows if there are any problems with the business, while the Buyer does not.  It is best to identify and resolve all potential issues before listing the property for sale.

The Seller should determine the value of the business, perhaps through an appraisal or in consultation with a qualified certified public accountant or business broker. The Seller must decide whether financing will be provided to the Buyer.

Purchase Agreement Issue: The Seller should conduct a preliminary judgment and lien search on itself and its owners in order to insure that there are no problems that will later be discovered by the Buyer.  Even the appearance of an unresolved problem may make a Buyer uneasy.

If the Seller is an entity, it should make sure that all legal formalities and documentation are up to date, and that it is in good standing with the State. The Seller should gather all financial data, tax returns, financial statements, etc. in order to avoid delay.

The Buyer will require that the Seller make certain representations and warranties. The Seller should be careful in providing these representations and warranties, and make sure that they are reasonable and appropriate.

The Seller should timely respond to the Buyer's due diligence requests. In the event the Seller is to finance all or a portion of the purchase price, the Seller's attorney should prepare the following documents: promissory note, security agreement, stock pledge agreement, UCC-1, and personal guarantee by the Buyer's owners, if the Buyer is an entity.

Closing Documents: The closing documents are essentially the same as specified above for buying a business. With regard to closing documents, the principal distinction between being a Buyer or a Seller has to do with who will prepare the various closing documents.  As indicated above, the Buyer will want to prepare certain documents, but in the event of Seller-financing, the Seller would want to prepare other documents.

 

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Who we are
Robert R. HendryRobert R. Hendry received both a Bachelor of Arts degree and a Juris Doctor degree from the University of Florida. Although he began his career in Pensacola, Florida, Mr. Hendry has practiced law in Orlando for more than thirty years.
Richard D. StonerRichard D. Stoner received a Bachelor of Arts degree from New York University and a Juris Doctor degree from Stetson University College of Law. He has practiced law in Orlando, Florida for more than twenty-five years.
G. Steven BrownG. Steven Brown is a 1975 graduate of the University of Central Florida, where he received a Bachelor of Science in Business Administration degree with a major in Accountancy.
Law for FloridaHendry, Stoner & Brown, P.A. traces its roots back to 1970, when Robert Hendry and Richard Stoner were principals together in a predecessor law firm. Our attorneys are committed to giving clients the legal edge they need to succeed and prosper.