Vail Law: Buying a business is exciting, but don’t overlook the many details (column)
You’ve decided to buy a business. At last, at last, you will be your own boss; no one telling you what to do. The promised land of financial freedom is just around the corner. You can’t wait to roll up your sleeves and dig in.
But whoa, partner. Not so fast. To do it right — to start out on the right foot — there are about a million things to consider. Besides the obvious — what kind of business are you purchasing and how much are you willing to pay to buy it — there are details, details, details and many of them legal.
First, what are you buying? No, no, I know you’ve decided to buy a popsicle shop, but what, exactly are you buying? Are you buying the business itself or are you instead simply buying the assets of the business? And if the latter, are you purchasing all of the assets or simply some of them?
Time for some details
Let’s drill down on the distinction and the devices by which the options may be impacted.
In the first instance — you intend to buy the business itself — what you would be buying is the whole enchilada. Say the popsicle shop you have your eye on is called Popsicle Inc. Popsicle Inc. appears to be a corporation which — not entirely surprisingly — is in the business of manufacturing and selling popsicles. So far so good. As a corporation — large or small — Popsicle Inc. will have shareholders (those who own the business), officers and directors.
When you, the budding entrepreneur, determine to buy the whole shebang, what you will be buying is all the shares of the business. You will become the shareholder. And in so doing, you will succeed to all things Popsicle Inc. has, owns and will be responsible for, including all of its liabilities. Fast stop here; you will become the business with all its warts and wrinkles. If you choose to do so, the way to do so is via an SPA, a stock purchase agreement.
On the other hand, you think, well, not so fast. There are certain things to like about Popsicle Inc. but not everything about it blows your skirt up. Maybe buying the whole enchilada isn’t such a good idea. Maybe, the enchilada without the mole sauce might make more sense. What if, instead of taking Popsicle Inc. with all of its warts and wrinkles you could sort of pick and choose? What if you could pick out the good stuff and leave the nasty bits — such as those pesky liabilities — behind? If the seller is agreeable, the way to do so is via an APA, an asset purchase agreement. Rather than buying the whole business — rather than acquiring its shares — you decided, you’ll take this but not that. The brand-new popsicle-making machines are a must. You must assume Pop, Inc’s lease. The client lists, vendor accounts, and goodwill have got to be yours as well.
With an SPA you will become Popsicle, Inc. With an APA, not so much — you only buy some of the stuff that makes it up. Of course, the price you pay may differ with one form compared to the other.
OK, that’s settled — and by the way the foregoing should be run vigorously past both your lawyer and accountant — what’s next?
‘Doing the due’
First is “doing the due.” Rather than buying the proverbial pig in a poke (a “poke,” by the way being a pouch or bag), you want to see the goods. How does the business run? How profitable is it? What do the books — both corporate and financial — have to say? In what condition is the machinery? What is the inventory? Let’s have a peek at the lease. On and on it may go. In short, you want to make sure — as sure as you possibly can — the exact state of what you are about to buy. Are there any demons lurking? Do dragons live beyond the fringes?
Any APA or SPA worth its salt — or in this case, maybe worth its popsicle syrup — must include open access to the seller’s secrets and a reasonable period to examine them. This, of course, may cause the seller to break out in hives and so the way this is usually addressed is by way of a confidentiality agreement. Yes, the seller says, you can take a long peek at my privates, but you must assure me — in writing — that the only use you’ll make of the information is to evaluate the business. If you determine not to buy, then your lips are zipped. No sharing what you’ve learned with others.
Then there is other stuff.
Still more details
Say everything looks good. You’ve done the due and it’s full steam ahead. While the details can be endless, a few other things to consider are these:
Does the lease need to be extended or renegotiated? Are there any pending zoning changes that might make your intended use verboten? And, hey, what about you? How do you intend to do business? If you’re acquiring the assets of Popsicle Inc., how will you do business? Will you be a corporation, a partnership, a limited liability company? Whichever you choose, it will have to be formed and registered. You will have to obtain an Employer Identification Number from the IRS so Uncle Sam can ding you appropriately for taxes. You will also have to obtain a business license from the municipality in which you intend to operate and, depending on the type of business (liquor stores, food businesses, marijuana vendors etc.), there may be special licenses and permissions to obtain.
And what about the old Popsicle Inc.? Once it is bought out by whatever means, do you intend to let it — and/or its principals — compete with you? If the answer is “no,” you will need a non-compete agreement which will bar the former owner from competing with you in a defined geographical area for an agreed-upon period of time and from pilfering your vendors and employees.
What about employee contacts and an employee handbook? Have you thought about insurance — including workers comp insurance? Do the vendor agreements need to be rewritten, assigned or renewed?
Details, details and more details. While buying a business can be exciting and hopefully your own private gold mine, “i”s need to be dotted and “t”s crossed. Starting off on the right foot? Priceless.
Rohn K. Robbins is an attorney licensed before the bars of Colorado and California who practices in the Vail Valley with the law firm of Stevens, Littman, Biddison, Tharp & Weinberg LLC. His practice areas include business and commercial transactions, real estate and development, family law, custody and divorce and civil litigation. Robbins may be reached at 970-926-4461 or at his email address, email@example.com.
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