CONSIDERATIONS FOR BUYING & SELLING BUSINESSES IN CALIFORNIA
Many different situations can lead to a business sale or purchase. A company's owner or partner may want to transfer ownership through a business succession plan. An entrepreneur may want to purchase a business that is already in full operation rather than start their own business from the ground up. One business may merge with or acquire another business. For each situation, there are specific legal requirements that must be satisfied. Failure to adhere to the legal requirements and deadlines may result in frustrations that impede the sale or purchase of a business. Working with a business law attorney will ensure that your business sale or purchase in California is completed successfully.
I provide legal counsel in Los Angeles and Ventura County and elsewhere in California to startups and founders, existing businesses, boards of directors and management teams, partners, and shareholders. I am also licensed to practice in New York. Whether you want to purchase or sell a business, I will guide you through the steps and proactively address legal and related financial and other business issues.
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The Process To Buy or Sell A Business In California
Properly and safely buying or selling even a small business can be far more complex than many realize. While the specific process varies depending on the circumstances, some key steps in the sale process exist.
Letter of Intent
Many deals involve a letter of intent or letter of interest ("LOI"). An LOI aids in the negotiation process and in preparing deal documents. An LOI creates a framework for due diligence, the expected timeline, and the "road map" for the deal. It outlines key business, legal, tax, accounting and other deal points. Most letters of intent do not require the parties to actually close a deal or even to prepare deal documents, but some binding provisions should be included and carefully drafted. But, beware: some states' laws may impose greater obligations on the parties to negotiate actual deal documents and proceed to closing even where an LOI purports to be non-binding. So, your LOI should not only be carefully prepared, but the choice of law governing your LOI can be important.
Business Valuation
Although not strictly required, in many cases, the parties to the purchase and sale of a business should obtain an independent valuation of the business before advertising a business for sale or making an offer. An independent, third-party valuation helps the seller price the business appropriately and gives the buyer a basis for negotiations.
Preliminary Negotiations
Even if a deal does not involve a written LOI as part of the negotiation process, before agreeing on the sale of a business or preparing definitive deal documents, buyers and sellers enter preliminary negotiations over key terms. This includes, most importantly, price, manner of payment, transaction structure (that is, asset sale, stock sale, merger, or other structure), preconditions to the sale that may need to be satisfied after signing a purchase and sale agreement but before closing, permitted reasons for terminating a deal before it closes, and consequences for impermissibly terminating the deal before it closes.
Due Diligence
A critical step of the process for a buyer is conducting investigatory due diligence to confirm the commercial value and viability of the seller's business. Due diligence is an investigatory process that involves a detailed review or audit of the seller's legal, financial and business records and affairs to confirm issues and explore questions that came up during the negotiation process. The results of due diligence can affect the preliminary agreement of the terms of the proposed sale. usually done by the buyer's attorney working with the seller's attorney, while business due diligence is done by the purchaser's management team. Financial and tax due diligence may involve buyer's lawyer, accountants, and management team.
Drafting Necessary Paperwork
Buying or selling a business involves a large amount of paperwork, including a non-binding LOI, as well as and various legally binding documents, including any number of the following (depending on the terms of your specific deal):
- Purchase agreement
- Escrow agreement
- Bill of sale
- Assignment of leases
- Other assignment agreements
- Promissory note
- Security agreement
- Guaranty agreement
- Nondisclosure (NDA's) or confidentiality agreements
- Non-compete agreement
- Transitional services agreement
- Employment agreement or consulting agreement
- Board and shareholder consents
- Officers' certificates of the seller
- Other ancillary agreements relevant to your deal
A corporate attorney can provide advice and assistance with negotiating the terms of and drafting these documents.
Pre-Closing Review
In a pre-closing review, the parties confirm all the required steps have been taken. This includes ensuring any necessary consents and approvals have been obtained – like those needed from landlords or suppliers.
Closing
It is common (but not necessarily required) that the main agreement (whether it is an asset purchase agreement, stock purchase agreement, purchase and sale agreement, merger agreement, contribution agreement, recapitalization agreement or other agreement) is signed first, with the closing schedule several weeks after. The sale is typically closed when all of the "closing conditions" provided for in the main agreement have been satisfied, the buyer and seller each delivers to the other all "closing deliverables" required by the the main agreement, and the buyer pays the agreed purchase price amount, the buyer and seller sign all other agreements required to finalize and effectuate the legal transfer of the business.
Post-Closing Tasks
Most mergers and acquisitions involve a number of responsibilities for one or both the parties even after the closing. Typically, these "post-closing covenants" will be spelled out in detail in the deal documents, and can encompass a number of obligations and matters. These may include:
- Dissolution of the seller entity in some cases
- Post-closing payments from buyer to seller
- Post-closing payments from seller to buyer
- Making certain state-law required filings
- Issuing press releases
- Certain restrictions on the seller parties (e.g., duty to not compete and not hire former employees)
- Non-disclosure obligations
- Duty of buyer to provide benefits to outgoing owners, officers or directors
- Duty of buyer to indemnify the seller and its outgoing "control persons"
- Other indemnification obligations
- Duty of buyer to provide similar employee benefits for a period of time
- Giving third-party notices not required at closing
- Companies that are subject to SEC reporting requirements may have to file a Current Report on Form 8-K within four business days after closing.
What Is A Business Worth?
An accurate business valuation is an essential step for both the seller (to ensure they're seeking a realistic price) and the buyer (to make sure they don't overpay).
While it's possible to run some general numbers yourself, many people seek the services of a professional business appraiser to value the business. Business valuation can be a complex process with several different ways to approach it.
A business valuation typically considers a number of factors and business operations, including:
- Business assets (including intellectual property)
- Recent earnings
- Expected future earnings
- Capitalization
- Book value
- Other financial metrics
- Business debts and liabilities
- Litigation exposure
- Expected changes in relevant law or regulations
Of course, getting the best and most accurate appraisal will benefit both the seller and the buyer.
3 Legal Issues To Consider When Selling A California Business
If you're selling a business, you should be aware of potential legal issues that may arise. A few of the most common issues often involve the following three situations.
- Confidentiality agreement. During the due diligence process, the buyer needs to have full access to the business's financial and other records. The seller will often want the buyer to sign a confidentiality agreement before allowing them to view this information, although in practice the protective provisions of an NDA will instead often be included in a letter of intent.
- Indemnification. The buyer may ask you to indemnify the sale or take financial responsibility for any claims arising from an event that occurs before the close of the sale.
- Continued employment. Buyers will often ask a seller to stay on with the business for some time after the sale and assist with the transition. The specific terms of this should be set out in the sale contract.
It's important to seek advice from a business attorney on these issues.
3 Legal Issues To Consider When Buying A California Business
If you are in the market to purchase a business, there are legal issues you should consider. Most of these issues involve one or all of the following matters.
- Non-compete agreement. You may want the seller to sign an appropriate non-compete agreement to prevent them from immediately opening a competing business after taking your purchase price. (NOTE: non-competes are becoming disfavored in courts and legislatures; although often still permissible depending on the circumstances, they should not be entered into without assistance of legal counsel.)
- Assets included in the purchase agreement. All the assets of a business must be expressly listed in the purchase agreement to ensure they form part of the sale.
- Due diligence. Due diligence is a complex and potentially lengthy process that should be undertaken by a qualified professional to ensure nothing is missed.
A business lawyer is best placed to provide expert advice on dealing with these issues.
WHY HIRE A BUSINESS LAW ATTORNEY WHEN BUYING OR SELLING A BUSINESS?
Whether you are a buyer or a seller (or are the target or acquiring entity in a merger, consolidation or other transaction), experienced corporate counsel will help you navigate the transaction, address legal issues that arise, and avoid common, costly mistakes often made by non-lawyers. Whether you and I work together, or you work with someone else, your interests should be represented by an experienced, independent business lawyer. Experienced legal counsel will work with you from the negotiation process, to the preparation of the letter of intent, to the drafting of the operative agreements and preparation and submission of any governmental filings, to closing and post-closing matters, to ensure all sale documents are drafted correctly and are legally binding and that all government obligations are satisfied.
In addition, a business lawyer can advise buyer or seller in connection with customary legal due diligence in connection with the deal to help prevent any business disputes from arising in the future.
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Disclaimer
This article is not legal advice, but is provided for general information purposes only: see the disclaimer in the footer of this site, and read Legal Notices here.