We often say that selling your business in California will take a team of experts. The business broker is like the quarterback of that team. There are also numerous legal intricacies associated with buying and selling a business in California.
To be brutally honest, the Buyer and Seller often come to the table with different expectations, and the attorney can be a valuable mediator to negotiate between the parties beyond those differences.
Despite these intricacies and frequent battles over legal expectations, there is often a debate over whether an attorney is necessary
for every business sale. The answer, in most cases, is “Yes, an attorney, or rather attorneys, need to be part of the team.” Why do we at Rogerson Business Services believe that? There are several reasons, but the primary ones are as follows.
The Legality of Who
In the sale of most businesses, it’s pretty obvious who owns the company being sold and who is doing the buying. However, in some cases, this is not as simple as it sounds. There are countless instances when a business broker will be approached by someone who lacks the necessary funds, lacks the authority to purchase the business, and may simply be seeking a potential Buyer for the company.
In other cases, the “Seller” may be a lower-level person in the company or a family member looking to convince the actual owner to sell by having an offer or offers on the table.
An attorney can help validate any claims and ensure that the business can be legally sold.
What is Being Sold?
A Seller can show a Buyer around the building they are in and their business, but what is the Buyer getting? When you sell or buy a business, there are two ways to go about it. The first is a stock sale, and the second is a sale of assets.
Which is better? It depends. In the Industrial Product Industry, a stock sale is often better. This is because if a corporation is sold in this manner, any existing government contracts may be continued by the new owner. If the business is sold as an asset sale, the contracts would legally have to be canceled and sent out for bid again.
This is true of a variety of businesses that engage in research, have specific leases or a lessor who does not want to continue the lease for some reason, or other legal contracts that the owners want or need to pass between them at the time of ownership change.
However, for many other businesses, an asset sale is more desirable, especially from the Buyer’s perspective. They only inherit liabilities they agree to, and they have a greater capacity for the depreciation of assets when tax time comes around.
Who can help you determine the best course? An attorney, often in combination with your business broker. They can tell you what a lease says and means to both parties, how contracts will be handled, and ensure that all liabilities have been disclosed.
Even at the stage where both parties are just determining what is for sale and how the sale will be structured, an attorney can be a valuable asset in the process.
Confidentiality
One of the key factors in selling a business successfully is maintaining confidentiality. This means that the Buyer must agree not to disclose any information about the sale to anyone until it is finalized. The reason is, in part, that key employees or clients may leave or seek to renegotiate their agreements if they are aware that the business is for sale.
This can potentially negatively impact the business’s value and even disrupt its operations altogether. A strong non-disclosure agreement with clear penalties for any violations is essential before either party exchanges any information with the other.
Agreement
If you have ever purchased a car, a home, or almost anything, you know that no job is complete until the paperwork is finished. There are numerous forms to fill out, whether you are a Buyer or a Seller. Here are a few examples:
The Buyer usually prepares a term sheet, which is a step above a verbal offer. It states the terms under which a Buyer would purchase the business. Consider the car-buying example: if you said to the salesman in the parking lot, “I’d give you $10,000 for that,” and the car is selling for $13,000, he can simply say no at that point.
However, if you visit the business manager’s office after your test drive and submit a written offer of $10,000, the salesperson may consider it or even counteroffer. Taking this a step further, term sheets are not legally binding but provide more detail than the written car offer, stating whether the sale will be a stock or asset sale, and how the Buyer intends to pay for the business.
An indication of interest is typically used when there are multiple interested Buyers, at least verbally, often in Merger and Acquisition type transactions. This can help the Seller narrow the field of many interested buyers to a handful who will send them this document. Similar to the above, it is also not binding, and the language should indicate this.
The Letter of Intent and an actual Purchasing Agreement are much more legally binding.
These are just a few of the forms and agreements you will work with during the purchase process.
The Conditions Your Conditions are In
Typically, like any other transaction, the sale of a business comes with conditions and contingencies.
Failure to meet any of these things can mean that the deal falls through. What are the things that often break deals?
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- The Buyer cannot get financing.
- The lease for the premises where the business is located cannot be negotiated to the Buyer’s satisfaction.
- Due diligence reveals that the business is not as profitable as stated or that potential liabilities exist.
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If the Seller offers financing, information that comes to light reveals that the Buyer may not be able to pay off the purchase price.
There are other possible conditions as well. It is a good idea at this point to have an attorney ensure that these conditions are both fair and not based on unreasonable expectations.
A note here: this is why we often advise negotiating your lease before selling your business. Ensure that your landlord will pass the lease to a new tenant and what is required for them to do so.
There is no worse feeling than a business deal falling through due to a stubborn landlord.
Representation and Due Diligence
At the start of a business sale, the Seller will present the business in a certain way. The Buyer will conduct a process called “due diligence” to verify the accuracy of the claims made by the Seller.
This is a very taxing process, and often quite time-consuming. We even discuss it in detail, as seen in this case study, which is related to the sale of a manufacturing business in California. You can view it for free by signing up for our newsletter.
There are a few keys to this process:
First, we pride ourselves on honesty and integrity; however, to protect ourselves from potential lawsuits, we must accurately and honestly represent your business.
- The Seller must be forthright and honest in any representations they make about the business, including liabilities and potential future lawsuits.
- The Buyer should verify all such claims, and this often involves an attorney, who can research and verify any legal claims. Thorough due diligence is essential to successfully buying and selling a business in California.
- The Seller needs to have all of their paperwork, legal and otherwise, in order. The Seller, their attorney, and their accountant must be ready to answer inquiries promptly.
The Buyer and Seller should each have their representation. Remember, your attorney will act in your best interest, and the other party’s attorney will act in theirs.
Licenses
Several businesses require licenses to operate, and some of those licenses are more complicated than others. Let’s take, for example, the sale of an asset in a construction business. In this case, the Buyer must have a valid contractor’s license in California.
This is also especially true when it comes to medical practices. The California Medical Board must first license Doctors.
Typically, the best source for this type of information is the licensing agency, and an attorney specializing in that area can often provide invaluable guidance quickly and efficiently.
The Tax Man
Tax implications associated with each type of transaction. The Buyer, of course, wants to be able to depreciate assets as much as possible and reap as many tax benefits as possible from the business purchase.
The Seller also wants minimal tax liability, as well as protection from future liability and other safeguards. Generally speaking, an asset sale is more tax-efficient for the Buyer, and a stock sale is more beneficial for the Seller. But as we stated above, there are exceptions. There are also legal considerations regarding your taxes.
Not only can an accountant help you weather these intricacies, but a tax attorney may also be able to help you protect yourself and your assets.
Escrow
One unique aspect of California is that, for most business sales transactions, escrow is typically required. There is also the Bulk Sale Law (BSL) that governs the sale of a business.
While many business brokers attempt to complete numerous steps in this process without an attorney, it is generally best for both parties to have an attorney review all documents before the final escrow and closing of the sale.
Attorney Pros and Cons
While there is some debate among business brokers about whether you “need” an attorney or not, it is not without basis. Selecting the right attorney to guide you through this process is crucial. Why?
The advantages of an attorney are:
- Due diligence is more thorough. The same is true when involving a good accountant
- Attorneys can spot potential legal issues before closing
- Attorneys can amend things at the last minute if need be, and speed up closing
- Using an attorney lessens the likelihood of litigation
- Your broker (and all parties) must follow the law
Those seem like all good things, right? Why would you not want to involve an attorney in such a legally complex process?
- Attorneys can be risk-averse and essentially want to limit their liability for their clients, whether they are the Buyer or Seller. It is virtually impossible to buy or sell a business with zero risk.
- They may refuse to use the standard CAAB forms used by most California business brokers. Creating your forms and documents can become expensive.
- Attorneys often dislike escrow, primarily when representing the Buyer. This can be a “deal killer” in some cases.
- Some attorneys may undermine the broker’s credibility and can be downright ruthless in their pursuit of their interests—another reason to choose your attorney carefully.
- Your attorney may want to negotiate everything. This can be beneficial, potentially saving you money, but over-negotiation or attempting to negotiate non-negotiable fees can also be a deal killer.
What is better? Should you have an attorney or not?
The Final Takeaway
Here at Rogerson Business Service, we highly recommend that both buyers and sellers have an attorney involved to protect themselves. Selling a business is often one of the most complex and financially significant decisions an individual will make in their life. Their business is often a bit part of the Seller’s retirement plan, and it is vitally important to get things right the first time.
Everything from escrow to taxes, leases to licensing, can have significant legal implications. You need to surround yourself with a team of professionals. That starts with a certified business broker, but it doesn’t stop there.
Are you ready to sell your business? You need a business broker to help you every step of the way. At Rogerson Business Services, we want to be your business broker. Contact us today. Get help when you decide to sell your business in California.
If you’re looking to purchase a business in California, explore the businesses we have for sale here.