Buying or selling your business is a major financial and emotional decision. It’s a process filled with legal complexities and numerous choices, all of which can impact your future. Whether you’re an entrepreneur looking to expand your portfolio, a small business owner ready to move on, or an investor keen on new opportunities, understanding the nuances is essential for success.
At Cornerstone Legal, we ensure that these decisions are grounded in knowledge and aligned with your goals. Below, we’ll walk you through key considerations and legal concepts you need to be familiar with when buying or selling a business.
If you need assistance with buying or selling a business, or other real estate help, please contact Cornerstone Legal at (517) 708-2222 or Katrina@CornerstoneLegalPLLC.com.
Stock Purchase vs. Asset Purchase
When structuring a business sale, one of the first decisions you’ll encounter is whether to pursue a stock purchase or an asset purchase. Both options have significant implications for legal liability, taxation, and the overall transaction outcome.
Stock Purchase
- Definition: The buyer purchases the company’s stock (ownership shares), acquiring the business as an entity, including all its assets, liabilities, and obligations.
- Seller’s Perspective: Sellers often prefer stock purchases because they provide a cleaner exit and transfer liabilities to the buyer.
- Buyer’s Perspective: Buyers may hesitate unless they are confident about the comprehensive condition of the business since liabilities are included.
Asset Purchase
- Definition: The buyer acquires specific assets of the business, such as equipment, inventory, intellectual property, and goodwill, but not ownership of the company entity.
- Seller’s Perspective: Asset sales may result in higher taxes for the seller, depending on depreciation and allocation rules.
- Buyer’s Perspective: Buyers often prefer asset purchases to avoid inheriting liabilities and can select exactly what they want to acquire.
Understanding which structure suits your situation is crucial. Consulting a legal expert is recommended to assess your risks and maximize your advantages.
Valuing Assets: Land, Equipment, Goodwill & More
Business valuation is not just about market value or cash flow. Proper valuation must take into account specific components like land, machinery, and goodwill. Here’s a breakdown of key considerations:
- Tangible Assets (e.g., land, buildings, vehicles, equipment): The market value or appraised value of physical assets will often form the basis of the sale price. Be sure these figures are up-to-date and specific to your local market.
- Intangible Assets (e.g., goodwill, brand reputation, intellectual property): These are harder to quantify, but they play a massive role in determining the overall value. Goodwill is often tied to customer loyalty and the reputation of the business and may require additional valuation expertise.
- Inventory: Proper inventory valuation is necessary to ensure neither the buyer nor the seller faces financial surprises during the transition.
Investing time in accurate appraisals prevents disputes and helps everyone approach the negotiation table with confidence.
Escrow Agreements
An escrow agreement can provide security for both parties during the transaction.
What is an Escrow Agreement?
This is a legal arrangement where a third party (the escrow agent) temporarily holds funds, documents, or other assets until specific conditions of the sale are met.
For example:
- If you’re selling a business, escrow ensures you won’t fully transfer assets until you receive payment.
- If you’re buying, escrow guarantees you’re receiving assets in the agreed-upon condition before releasing funds.
Escrow is an extra layer of protection that creates trust and reduces risks during the buying or selling process.
Non Solicitation and Non-Compete Agreements
When a seller exits a business, buyers often include non-solicitation or non-compete clauses in the purchase agreement to protect their investment.
Non Solicitation Agreement
This prevents the seller from reaching out to former employees or customers to compete with the business being sold.
Non-Compete Agreement
This restricts the seller from starting or working in a competing business within a specific area and/or time frame.
While highly effective in protecting buyer interests, these agreements must comply with legal regulations to avoid being deemed overly restrictive. Consulting with a business attorney ensures enforceability and fairness for all parties.
Third-Party Financing Options
Many business transactions involve financing, whether through loans or alternative arrangements. The two most common options for financing are bank loans and promissory notes/land contracts.
Bank Loans
- A traditional route for buyers, bank loans offer structured payment terms and access to competitive interest rates. However, the process can involve extensive documentation, strong financial backing, and a rigorous approval process.
Promissory Notes or Land Contracts
- These financing methods involve creating agreements directly between the buyer and seller.
- Example: The buyer may agree to make monthly payments to the seller rather than securing funding from a financial institution.
- While more flexible, these arrangements require detailed legal documentation to ensure both parties are protected.
Choosing the right financing option depends on the size of the transaction, the buyer’s financial history, and the relationship between the buyer and seller.
Why Choose Cornerstone Legal for Your Business Transaction?
Buying or selling your business is a milestone worth celebrating. However, ensuring the process is handled with care requires knowledgeable guidance. At Cornerstone Legal, we provide personalized, affordable legal support every step of the way, including structuring sales, creating agreements, and navigating complex negotiations.
More than just legal services, we aim to empower you with the tools and knowledge you need to feel confident in your decision-making. If you’re ready to take the next step in buying or selling a business, start building your foundation with Cornerstone Legal today. We’ll ensure your transaction is seamless and secure.
Start protecting your legacy now.
(517) 708-2222 or email me at Katrina@CornerstoneLegalPLLC.com.
Building your foundation. Building your confidence.
