Top Five Things to Consider When Acquiring a Business
By Enrico Costantini
Buying a business may seem like a difficult task, but with the right legal counsel, the process can go smoothly. To facilitate an acquisition, Rick Costantini, a partner on FLB Law’s Corporate & Business Transactions team, explains the top five things to consider when acquiring a business:
1. Buy The Assets: Rather than buying the membership interests or company stock of another business, Rick suggests buying just the assets. When you purchase a company’s stock or a member’s interest in a limited liability company, you also buy the liabilities (and who wants someone else’s problems!). Moreover, there could be liabilities that you and the sellers are unaware of at the time of purchase, even after conducting due diligence. While proper indemnification language can provide some relief, the most prudent strategy is simply buying what makes the business a business – its assets. When buying assets, you are not limited to just the physical items of the company (equipment, computers, etc.); the term assets can also include the company name and goodwill. While this approach may sound obvious, it’s a strategy often overlooked.
2. Allocation of Price: Price allocation is basically an accounting of the assets purchased, both tangible and intangible, to calculate the appropriate tax depreciation and amortization deduction. How the total price is allocated amongst the asset classes being purchased is a negotiable term that significantly impacts the tax liability going forward. Generally speaking, sellers prefer to allocate the purchase price to the assets with a basis so that they are taxed as capital gains. On the other hand, buyers typically want to assign the purchase price to assets that can be depreciated or written off the quickest. While your attorneys can help negotiate these competing interests, we always advise bringing in your CPA at an early stage since he or she not only understands the tax code but also understands your situation holistically – such as other businesses or investment properties you may own – and can suggest a strategy that minimizes your tax liability.
3. Do Your Due Diligence: As a buyer, you should thoroughly understand the assets you’re acquiring; hence you should negotiate an appropriate timeframe to conduct your due diligence. Time spent on the front end will minimize unwelcome surprises later on. We always ask our clients to provide a comprehensive list of the assets being purchased so that we can run the necessary reports to ensure they are not encumbered. For example, if you are buying real property, we will run a title search to ensure it is free and clear of liens, and when buying machinery of any kind, including vehicles, in addition to conducting a UCC lien search, this is the time to obtain maintenance records to ensure the assets have been properly serviced. The contract should clearly state that the purchase is contingent on rectifying any issues within a specific time period.
4. Rehire Employees: As mentioned previously, the sensible way to acquire a business is by buying only its assets, but what if you want to employ some of the company’s employees? Rick encourages his clients to structure their purchase agreements with language that clearly states that the agreement does not include any obligation to employees. If a buyer wants to hire existing employees, we recommend they engage in discussions with those who are of interest and seek to hire them directly. If you include employees in the purchase agreement, it can be interpreted as an employment contract which can cause issues if you choose to terminate any of them later.
5. Noncompete Agreements: When buying a company, you want to ensure that the seller doesn’t turn around and set up shop with a competing business across the street from yours; hence the reason for a noncompete agreement. Noncompete language in a purchase and sale agreement typically restricts the seller from competing with your business and from trying to lure away clients and/or employees. This tends to be standard operating procedure when the buyer is acquiring all of the assets but may not be if only a portion is sold. Noncompete agreements must specify a reasonable timeframe and location that is off limits to the seller as courts have become intolerant of unreasonable restrictions and have been known to void noncompetes that are overly restrictive.
While this is not an all-inclusive list of considerations buyers should consider when acquiring a business, these represent a good starting point. Rick stresses that open and frequent communication is paramount to the attorney-client relationship, as are organization and attention to detail. There are many moving parts; keeping checklists and scheduling weekly calls are two effective ways to stay on track.
For more information about FLB Law’s Corporate & Business Transactions Practice, contact Rick Costantini. FLB Law is also looking to hire experienced attorneys focusing on corporate and business transactions. Please get in touch with Rick if you are interested in exploring a career at FLB Law.