If you are considering buying or selling a business, what should you be thinking about?
First, are you selling or buying only assets, or the whole business? A buyer usually prefers to purchase just the assets in the seller’s business, so that the buyer does not assume the selling company’s debts. A seller typically prefers an “entity sale,” meaning the sale of the company itself, its stock, its debts and its assets. This relieves the seller of future responsibility on the company’s debts, as the buyer takes them as part of the deal. Of course, the price can be set fairly either way. It is just a matter of doing math to adjust for whether debt is included or excluded. In an entity sale, special contract language is needed to protect the buyer from unknown or undisclosed debts.
Second, both parties need to plan well for debts connected to the business. The seller should be concerned about personal guarantees on any loans that are to be taken by the buyer. The seller is still on the hook to the bank for the seller’s personal guarantee, even after the business or asset is sold. It is important that the loan be paid off from closing, or that the buyer get its own loan to replace the seller’s loan and its guarantee. Otherwise, the seller remains at risk; if the buyer defaults on payments, the seller who signed a guarantee may have to pay off the loan for an asset he no longer owns. On the flip side, if a buyer simply takes over making payments on a vehicle loan in the seller’s name, when the loan is paid off (which could be years later), the bank will send the title to the seller unless other arrangements are made. That poses a risk to the buyer.
Third, will the price be paid in one lump sum at closing, or will part of it be financed by the seller? If you are a seller providing financing, you will want adequate security for payment. That may include a security interest in business assets, but even better is a deed of trust against the buyer’s real estate, particularly their home. If the buyer pledges the buyer’s home as collateral for the debt, there is more motivation to pay than if only the business assets are pledged.
Fourth, does the buyer need a non-compete agreement from the seller? Buyers do not want to risk that, after paying good money for a business, the seller sets up shop under another name a few blocks away. Sellers may be selling because they are retiring or moving away. However, a non-compete is still a good idea in case the seller’s plans change. If a seller is retiring or moving away, signing the non-compete will not hurt.
Fifth, what is needed for a successful transition? For some businesses, simply having the seller available for phone or email consultation for a few weeks will be sufficient. For others, it will be important that the seller be physically present at the business for a period of time to facilitate transition.
Give careful thought to details ahead of time, and have proper documentation for your agreement. This will help assure a successful transaction, whether you are the buyer or the seller.
Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough, NC. She can be reached at 919-732-7300 or firstname.lastname@example.org.
This article was last updated in January 2020.