Guide To Selling a Business

An attorney with small business expertise is essential to a buy/sell transaction. However, in general it is not necessary to bring your lawyer into the picture until there is a possible deal on the table. Most of what a lawyer has to contribute comes later. Under all circumstances, do talk to your lawyer before you sign any commitment to sell your company.

Some of the legal issues are outlined below.

Stock Versus Asset Sale

Stock Sale

One way to sell a corporation is through the sale of its stock. In this scenario, the buyer would keep your corporate structure. The stock that you (you, being the stockholders) own would be sold to the buyer on the agreed upon price and terms. The legally created entity of the corporation would continue under the new owner. The new owner would probably replace the officers of the corporation.

A stock sale may make sense if there is to be a partial buyout. If someone wanted to buy into the corporation at 25%, 50%, 60% or any other proportion, he or she would merely buy that percentage of the stock. Compared to the alternatives, a stock sale makes partial ownership transition relatively simple.

One interesting advantage of a stock sale is that leases and other agreements with the corporation would remain intact unless there were specific provisions dealing with ownership transition. If, for example, the corporation had a lease with very favorable terms, that lease could be passed on to the new owner without the landlord's specific permission.

A second interesting advantage of a stock sale is that tax credits and or tax loss carry forwards on the tax return of the corporation, pass along to the new owner. This in and of itself may have value to some buyers.

Another advantage to a stock sale from the seller's point of view is that it could save on taxes. Under an asset sale a C-Corporation's owner(s) might be taxed twice-- first on the corporate level, then on the individual level. This is discussed in the previous section (section XIII).

In a stock sale, unless specifically stated otherwise, all cash, accounts receivables, property, and other assets would upon closing belong to the buyer. All liabilities such as accounts payable, short-term debt, and long-term debt would also become the buyer's responsibility. However, if any loans were guaranteed personally, the personal guarantee would stay intact unless specific arrangements were made with the lender.

A problem in a stock sale from the buyer's perspective is that any legal action brought against the corporation for past events, or any tax liabilities including those from previous years, would be the buyer's responsibility, unless the seller were to specifically agree otherwise. Even in the case of specific agreements for past liabilities or legal action, the new owner would have to contend with the situation and then collect from the previous owner. If the IRS were to audit a corporation after it were sold but for a period that it was owned by the previous owner, it could hold the corporation (meaning its new owner) responsible. The new owner would have to cooperate with the audit, and if past taxes were due, the corporation would be responsible, so far as the IRS is concerned.

Because of the potential liabilities of skeletons in the closet, buyers often shy away from buying corporations through the sale of stock. When they do enter into stock sales for closely held corporations, they usually insist that the seller take responsibility for any and all previous liabilities, and they guarantee through sworn statement the assets and liabilities and general accuracy and completeness of the balance sheet.

Asset Sale

In an asset sale, the buyer buys some or all of the firm's tangible and intangible assets such as equipment, patents, customer lists, business name, and goodwill. Stock does not change hands. The existing corporation essentially sells off the assets to the buyer, which can be an individual, partnership, or corporation. To add a layer of protection against possible liability, a buyer's lawyer will often advise the buyer to set up a corporation to buy the assets.

Typically in an asset sale, cash, accounts receivable, and all liabilities would remain with the previous owner's corporation. The company would be delivered free of debt to the new owner. The accounts receivable would be paid to the old corporation, and therefore to the seller. However, some people feel that the buyer is best advised to buy the receivables as part of the transaction. The logic here is that:

a) It gives the buyer more control over the customer list which is often the major asset being transferred.

b) It can prevent bookkeeping problems and disagreements, such as allocating partial payments, credits, returns, etc.

c) It is often easier for the buyer to collect debts because the business has an ongoing relationship that the client wants to keep intact. If the client never expects to see the former owners again, they may feel they have less to lose by not paying their debts.

Unlike with a stock sale, leases and other agreements could not be automatically transferred. Unless the agreement specifically stated otherwise (for example, a lease may be assignable), a new lease would need to be negotiated with the landlord.

In the case of a partial buyout, an asset sale is a bit more cumbersome, but still workable. In a partial buyout on a stock sale basis, the buyer would purchase the agreed upon proportion of the firm's stock. In an asset sale, a new corporation could be set up to buy the assets of the selling corporation. Stock in the new corporation would be divided between buyer and seller based upon the agreed proportion of ownership.

The majority of closely held corporations are sold on an asset sale basis. The primary reason for this is the buyer's fear of taking on unexpected liabilities.

Buying Unincorporated Companies

In essence, an unincorporated company must either be sold on an asset basis or it must first be incorporated, and then sold on a stock basis. However, there is no reason that an existing or a newly formed corporation cannot purchase a proprietorship. This is often done to facilitate a partial acquisition of an unincorporated firm.

A partial sale under this scenario would be achieved as follows:

A corporation is formed by buyer and seller. Stock is divided between buyer and seller based upon the agreed ownership proportions. Then, the new corporation purchases the seller's unincorporated firm. The result; each party now owns the agreed proportion of the acquired company as well, as it is absorbed into the new corporation.

Bulk Sales Act

All 50 states of the United States have agreed to a set of rules and regulations known as the "Uniform Commercial Code". In short the UCC is a body of laws and regulations that govern commercial transactions.

One provision of the UCC --The Bulk Sales Act-used to be very relevant to the sale of businesses. The Bulk Sales Act essentially protects the creditors of a business from the possible sale in bulk of the assets of that business for the purpose of defrauding the creditors. That is, a business owner cannot sell off his business or major parts thereof without creditors being notified of his intention.

Fortunately, in many states, the bulk sales act has been repealed. In states where it has not been repealed, it has been narrowed in scope. For example the bulk sales act generally does not apply to sales of assets less than $10,000,000 or greater than $25,000,000. While you should check with your attorney, it is unlikely that the Bulk Sales Act should be a problem in the sale of your business.

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