A quick and effective way to grow/expand your business is buying another business, whether it is buying a competitor or a supplier in order to vertically integrate. And, with interest rates so low these days, now may be a great time to start considering expanding your business through acquisition.
There are two ways to buy a business: an equity purchase and an asset purchase. In an equity purchase you buy the the company (whether corporation or limited liability company) that operates the business. Here the owners of the company will sell their shares (or membership interests as the case may be) to the buyer. In an equity purchase, since it is the company that is being purchased, that company will continue to exist after the transaction and so will its debts and liabilities.
In an asset purchase, instead of buying the company itself, the buyer purchases the assets used to operate the business. This includes real property, equipment, inventory, intellectual property (websites, trademarks) and the assignment of existing contracts. Since only the assets are being transferred, any debts or liabilities of the acquired business will remain with the company/seller and not pass to the buyer.
When acquiring a business there are four main components of the transaction: the initial offer and negotiations that can be documented in a letter of intent, negotiations of the purchase agreement, the due diligence and the closing.
Letter of Intent
A Letter of Intent (LOI) or a term sheet should be used to memorialize the initial negotiations, which significantly and efficiently helps move the transaction along. The core terms of the transaction, such as, the purchase price, financing terms, and restrictive covenants, are agreed upon in the LOI. The LOI, however, is typically non-binding, which means that either party retains the right to walk away from the transaction. While non-binding, the LOI is still very useful because it requires the parties to come to terms on the important aspects of the transaction And the more that is laid out and agreed to in the LOI, the quicker the next stage of the transaction will go.
Once the core terms of the purchase are agreed to, then it is time to move on to the purchase agreement. The purchase agreement is a binding contract that will be significantly more extensive than the LOI since it contains all the terms of the purchase. In addition to the core terms covered in the LOI, matters such as due diligence items and procedures, warrants and representations, indemnification, closing procedures, conditions required for closing, dispute resolution, and confidentiality. Since the purchase agreement is binding on the parties once executed, a party would be in breach of contract should the party attempt to walk away from the transaction. In that case, the non-breaching party may be entitled to monetary damages, as well as the right to force the other party to proceed with the transaction.
Once the purchase agreement is executed the due diligence period will begin. Due diligence gives the buyer the opportunity to verify information about the business being acquired by reviewing the business’ financial records, contracts, assets, physical locations, employment records and any other information that is important to the buyer. During the due diligence, the buyer typically has the opportunity to walk away from the deal without any penalty and for any reason. During the due diligence period it is also prudent to begin working on any third-party approvals that are necessary for the transaction, such as minority owners, landlords, mortgagors, secured creditors, or franchisors.
The closing finishes the transaction and officially transfers the business (or assets) from the seller to the buyer. The buyer will pay the purchase price, and the seller will execute any documents necessary to effectuate the transfer. In the case of an equity purchase, the seller will assign the shares or membership interests; and in the case of an asset purchase, the seller will execute assignments for intangible property, bills of sale for tangible property, and deeds for real property. Also, key personnel of the seller may also be required to execute post-closing restrictive covenants, such as a non-compete or confidentiality agreement.
As a business owner’s law firm, Ser & Associates regularly assists its clients in both buying and selling businesses. If you are interested in or already in the process of buying a business, we would be happy to assist you in the process. Please feel free to contact us today at 305.222.7282. Also, please be sure to visit us at www.Ser-Associates.com and follow us on Instagram, Facebook, and/or LinkedIn.