Robbins: Buying a business starts with a well-conceived agreement
The SPCA forgive me, but there is more than one way to skin a cat.
In this case, the particular moggy we wish to skin is the cat of purchasing a business. Before we get to the Promised Land of our subject, though, a little background into business forms and their distinctions would be helpful.
Like types of running shoes in a sporting goods store, in today’s world, there are almost as many kinds of business as there are types of flowers in a blossoming Spring meadow each of which, like arch support, tread, or last, enjoys its own particular advantages.
Some of the biggies are corporations (both closely held and publicly traded), limited liability companies, partnerships, and sole proprietorships. This, as you might imagine, is not a comprehensive list; there are spin-offs and permutations of all sorts.
There are, for example, limited partnerships; limited liability partnerships; limited liability limited partnerships; family limited partnerships; depending on your jurisdiction, what are known as “B Corps” or “benefit” corporations which tout social and environmental responsibility; and a myriad of others. As such, how you skin the kitty of a business acquisition depends upon the kind of feline you wish to grasp.
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Except with large-scale enterprises (think Coca-Cola, Nike, United Airlines, and other big boys of their ilk), three of the more common forms of ownership of “mom and pop” business which, without intending to be pejorative, can be worth a pretty penny, are S corps, LLCs and sole proprietorships or small partnerships (sometimes literally, in nature, mom and pop). While there may be distinctions aplenty between them, a few keys to consider are that S corps (more formally Subchapter S corporation, owing to Subchapter S of Chapter 1 of the Internal Revenue Code that governs them), are owned by shareholders who, not surprisingly perhaps, own “shares” in the company.
Limited liability companies, on the other hand, do not have shares; instead, they have “units” or “membership units” which are owned by the “members” rather than by shareholders. The overarching governance instruments of an S Corp are the Articles of Incorporation and the Bylaws. Those of an LLC are the Articles of Organization and the Operating Agreement. These instruments are the “recipes” for how the particular entity is to be governed.
Both S corporations and LLCs are, at law, legal beings, separate and distinct from their equitable owners (whether the owners are shareholders in the case of an S corp or members in the instance of an LLC). Sole proprietorships, on the other hand, are just a guy — or maybe a couple of guys — doing business under their own or perhaps an assumed name.
In another column, I will one day detail the disadvantages of doing business as a sole proprietor rather than under the protections of an entity (such as an S corp or LLC) of separate legal beinghood and limited liability.
With this background behind us, let’s look at the potential sale or other acquisition of a business. Here too there are divisions and decisions to be had and made. What precisely is it that the buyer wishes to acquire? Does he, she, or they wish to procure the whole shebang (including the debts and obligations of the business), or do they wish to cherry-pick? “Um … I’d like this, please, but not that.”
Identifying precisely what it is that is being acquired informs the structure of the sale. When the buyer wishes to purchase the whole shootin’ match, lock, stock and barrel including all pending and ongoing liabilities, most commonly they will acquire the business via a stock purchase agreement (or SPA) in the case of a corporation or its analog, a Membership Unit Purchase Agreement in the instance of an LLC. Where, however, the buyer wishes only to purchase certain assets of the business, an Asset Purchase Agreement more closely fits the bill.
Although different in some regards when purchasing a sole proprietorship, in principle, the concept is the same; is the buyer purchasing the whole enchilada or only certain defined elements of it?
Once the whats, whens, and how much of the deal are ironed out, an acquisition agreement will be prepared, whether an APA or SPA which will include certain terms, conditions and contingencies, including various rights and obligations of disclosure and due diligence.
If and when the stars align, oh happy day! Something like in adoption, the bouncing baby of the enterprise will have a new mom and dad.
Properly considering and crafting the acquisition agreement is often the key to clear sailing. Properly prepared, to the greatest degree possible, ambiguity and confusion are eliminated, assuring smooth transaction water.
Acquiring a business, whether in whole or only certain of its assets, can be mutually rewarding, enriching to both the buyer and the seller. But as these kinds of deals can at times be fraught with unanticipated landmines, particular care is required in their careful construction. Buying (or selling) an ongoing concern can be both thrilling and rewarding but, like a roller coaster ride, it is wise to strap in first with the properly constructed “seatbelt” of a well-conceived agreement.
Rohn K. Robbins is an attorney licensed before the Bars of Colorado and California who practices Of Counsel in the Vail Valley with the law firm of Caplan & Earnest, 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 at Rrobbins@CELaw.com. His novels, “How to Raise a Shark (an apocryphal tale),” “The Stone Minder’s Daughter,” and “Why I Walk so Slow” are currently available at fine booksellers.