Buying or selling a business may seem like a straightforward process. Still, seasoned business advisors, such as Andrew Rogerson in Sacramento, recognize that these transactions involve a multitude of issues. Those issues must be resolved.
This includes factors such as the type of transfer that best suits the situation. These circumstances dictate several details. These include whether the business will be relocated, whether the land on which it operates will be purchased or leased, and the manner of the transfer itself.
With these factors in mind, there are three types of buy-sell agreements. The most suitable one depends on the specific circumstances of a particular transfer.
Asset Purchases
This type of agreement allows buyers to avoid assuming the seller’s liabilities when acquiring the business. Asset transfers are the most common way small businesses are bought and sold. This is because the buyer can select which liabilities they wish to assume. In this situation, the buyer typically forms a new entity that agrees to acquire “substantially all of the assets” of the entity owning the business being purchased.
However, forming a corporation alone does not completely limit liability to an acquired business. Some liabilities can be avoided only if specific steps are taken.
For example, in California, to avoid employment, sales, and franchise taxes, the buyer must obtain tax clearance certificates or releases. This step will protect a buyer from litigation over a seller’s unsecured creditor claims. Secured creditor claims that would otherwise become the buyer’s responsibility after the sale can be terminated before closing. This is done with the agreement of the secured party by filing UCC termination statements.
For other liabilities, the buyer needs to be clear that there’s no implied assumption. With proper planning, an asset purchase agreement can be leveraged to avoid successor liability.
Stock Transfers
One alternative to an asset purchase is a stock transfer, where the buyer purchases stock but doesn’t acquire successor liability. However, the purchaser does acquire the entity, which retains all its liabilities.
While the buyer may want to purchase assets, a seller may insist on a stock transfer. Although sellers frequently sell assets, the cost of doing so can sometimes be too high. However, a stock transfer will only affect the capital stock of the business. The company continues to operate without changing hands. The seller won’t have to pay off the liabilities because it’s not winding down.
From the buyer’s perspective, the advantage of this type of agreement is the purchase price… It’s lower. That reduces the need for an immediate cash outlay, and liability can often be reduced or eliminated over time.
Sometimes, the parties will agree to transfer only a percentage of the business. This occurs when cash is needed or when an employee or the owner’s children are going to buy into the business.
A buyer typically pays more for assets than for stock because the seller retains the company’s liabilities.
Owner’s Agreement
An owner’s agreement is always a good idea as part of a partial transfer. This type of agreement protects a buyer and seller from the result of being partners with an ex-spouse who acquires an interest in the business in a divorce, a creditor who forecloses on an interest in the business, or an heir who inherits an interest in the company. It can untangle messy business situations.
But an asset purchase agreement without specific terms can expose the buyer to unnecessary liability. It should state that the buyer isn’t assuming any obligations of the seller—except those specifically stated in the purchase agreement. Furthermore, a buyer who fails to act consistently with the statement that they are not assuming liabilities may be held liable as a successor in an asset transfer. Successor liability can arise when the buyer assumes the seller’s business.
One mistake that buyers frequently make is seeing themselves as buying the whole operation when they’re purchasing just the assets. If “only assets” are purchased, the buyer will need to modify their approach. This is so the business doesn’t appear to be a continuation of the seller’s operation.
Handling the hiring and re-hiring of employees
Another mistake is when a buyer tries to make a smooth transition and provides benefits to employees that they received from the seller, such as seniority or vacation pay. Agreeing to continue even one of the seller’s employment obligations can create successor liability. This is because it implies an agreement to assume the liability. Instead, a buyer should consider terminating the employees and re-hiring them with new employment terms. Even if the policies end up the same as the seller’s, this can protect the buyer from assuming the seller’s employment liability. This is provided they do not agree to assume the seller’s obligations as to any established policy of the seller.
In the past, buyers would receive salary histories from sellers for their employees. However, under a new California law that took effect on January 1, 2017, requesting an employee’s salary history could result in a claim of wage discrimination against the employer by the employee’s coworkers. Instead, ask prospective employees what they are looking for in compensation. In your conversation, you can also ask for their rationale. If they tell you their prior salary without your asking, it’s permissible as long as you don’t base their pay on their salary history.
You should keep a record of the reason for the salary decision. Ensure it’s not based solely on salary history.
Partner with a Business Expert in Sacramento
California business advisor Andrew Rogerson specializes in helping business owners sell their businesses. This includes a business valuation. It also involves creating a marketing strategy and handling all phases of the transaction. This includes third-party lending, due diligence, and escrow.
If you have questions about the value of your business, please don’t hesitate to contact Andrew Rogerson or call me Toll-Free at (844) 414-9700 or email me at support@rogersonbusinessservices.com.