Legal Line: Practical Legal Issues for Buying a Business

  
     
May 16, 2011

If our economy is to get back on track, it needs to be driven by small businesses and entrepreneurs.  If you have a great idea and a desire to work for yourself, you can start your own business.  Or, if you want to move forward with the ideas, concepts and customers of an existing business you may be advised to purchase an existing business.  While purchasing an existing business is a great way to jump start your entrepreneurial endeavors, it is also a course of action that needs to be carefully considered.  You should map out a good strategy as you proceed with a purchase transaction.

            First, it is advisable to create a new entity (that you will own) that will acquire the assets of your target business.  A new entity (whether it is a corporation, a limited liability company, a limited partnership or a limited liability partnership) should protect you with the benefit of limited liability.  With a new limited liability entity, the most you can lose is your investment in the new business.  Your other assets, like your home and savings, should then be sheltered from the liabilities of the new business.

            You should attempt to purchase only the assets (equipment, vehicles, trademarks, customer lists, etc.) of the business (as opposed to the stock of the selling corporation or the membership interests of the selling limited liability company).  Ideally, your new entity would only have the liabilities and obligations that you have intentionally acquired.  By purchasing only the assets, the obligations and debt of the target business would be left with the seller. 

            It is important to obtain a complete listing of the assets to be purchased.  Typically a buyer does not need to purchase all of the assets.  You only need to acquire the operating assets that are needed for your future operations.  This selection would also allow you to reduce your initial costs.

            Although you are best advised to only purchase the assets of a business, sometimes it is appropriate to assume some of the liabilities of the existing business.  For example, there may be a lease or an advertising contract or a telephone directory listing that is important to the ongoing operations.  If you consider assuming any liabilities of the seller it is important to fully review the terms of these existing liabilities before you consider assuming them. 

            The employees (and their respective employment contracts and benefits) will not automatically be transferred to you.  The seller will need to terminate all of his employees and pay all wages and benefits due to them.  You need to review the specific employees, their duties, and contributions to the business, compensation and benefits.  As the buyer, you can then select which employees of the seller you want to hire.

            When you determine what is being purchased and what, if any, employees, liabilities or other obligations you are acquiring, it is time to prepare a letter of intent to state these terms in writing.  The letter of intent needs to list the assets to be purchased, the liabilities to be assumed, the amount to be paid and the next steps to be taken.  The letter of intent needs to expressly state it is a non-binding document.  The letter of intent is only intended to be a written expression of what is to be done when the buyer and the seller have generally agreed upon the terms of the transaction.  Then, a definitive purchase and sale agreement is drafted.  The definitive agreement is the document that specifically states the terms of the transaction and creates the legal obligation of the parties. You are best advised to engage counsel to prepare or review the definitive purchase agreement and assist with the completion of the detail of the transaction.


            This article was written by Marc D. Fine, a partner with Rudolph, Fine, Porter & Johnson, LLP (www.rfpj.com) in Evansville, Indiana.  For additional information, you may contact Marc D. Fine at (812) 422-9444 (e-mail:mdf@rfpj.com).  His practice areas include probate and estate planning, tax law, trust administration, corporate and business law, banking, and real estate law.

This article is intended solely as an information source and its contents should not be construed as legal advice.  Readers should not act upon the information presented without professional counsel.