Buying or Selling a Business

Buying or selling a business is a big decision. If you are contemplating buying or selling a business consider retaining the services of a qualified business broker. Keep in mind, however, that business brokers are not regulated the same way that real estate agents, attorneys, medical doctors and accountants are regulated. There is no state agency in California that licenses business brokers. Many business brokers have a background only in real estate sales. Make sure your business broker has a strong background in finance, marketing and business valuating.

A business attorney is essential if you are buying or selling a business. If you are buying a business, a business attorney can make sure the business you are buying has complied with all local, county and state laws. The attorney can make sure the business location is zoned properly for the business you are buying. The attorney can make sure that the purchase agreement is properly drafted, and that it contains a non-compete clause that will protect your interests. If you are selling a business, a business attorney can make sure the purchase agreement protects your interests, and that any promissory note or security agreement that is drafted is drafted correctly.

There are two ways to sell a business if the business is owned by a corporation. You can sell the business through a stock purchase or through an "assets only" purchase. If you use a stock purchase, you are selling all of the outstanding shares of stock to the buyer. The buyer is buying the business and all of its assets and liabilities. If it is an "asset only" sale, the buyer is only purchasing the assets of the business. The buyer is not buying the liabilities. In an "asset only" sale will, the selling corporation's shareholders must approve the sale. Typically, the selling corporation will dissolve and liquidate after the sale, distributing to its shareholders its remaining assets, which is often the money received from the sale of its assets.

In an "asset only" purchase, it is important to determine whether the corporation selling the assets is a party to any contracts limiting the ability of the corporation to sell its assets. For example, many equipment leases prohibit the sale of the equipment to a new owner. Most commercial leases will not allow the purchaser to simply take over the commercial leased space where the selling corporation ws located.

An individual purchasing a corporation through a stock purchase or an "asset only" purchase should consider, as part of the purchase, requiring the selling corporation's officers, directors, and/or shareholders to enter into a covenant not to compete as part of the sale. California law generally disfavors covenants not to compete because they are contracts in restraint of trade. However, such covenants are valid where given by:

• The seller of a business, including its goodwill;

• A “substantial” shareholder selling all of his or her shares;

• Any shareholder of a corporation which sells all or substantially all of its operating assets (or the assets of any of its divisions or subsidiaries) together with the goodwill;

or 

• Any shareholder of a corporation that sells all of its ownership interest in a subsidiary.

A covenant not to compete will be enforced only to prevent competing activities within a specified geographic area; typically in the county where the selling corporation conducted it business, and only for so long as the buyer or its successors carry on a like business.

 A covenant not to solicit the acquired business' employees and customers is permissible because it prevents the seller from eroding the very goodwill it sold. On the other hand, a covenant barring the seller from soliciting all employees and customers of the seller, including those who were not employees or customers of the acquired business, would give the buyer unduly broad protection against competition.

 Payments made under a covenant not to compete are amortizable over a 15–year period by the acquiring person or corporation. The payments are not otherwise deductible or depreciable.

 With respect to taxes, in general the selling corporation or shareholders will usually want the transaction to be “tax-free” (i.e., structured to avoid presently taxable gains on the sale). On the other hand, the acquiror/buyer may want the acquisition to be taxable to the sellers in order to obtain a “step-up” in basis of the assets acquired. The transaction's form will determine whether it is taxable or nontaxable, or trigger sales and property taxes. The buyer and seller should seek the advice of a good CPA.

 Sales taxes may be imposed on a sale of assets, but not on a merger or stock acquisition.

 An acquisition of assets is accounted for as a “purchase.” The acquirer must allocate the fair market value of the consideration paid for the acquired assets in accordance with their fair market values. As a result, the assets are brought onto the acquirer's/buyer's balance sheet at their fair market (“stepped-up”) values, not the former (“carryover”) values shown on the acquired corporation's books.

Where the total price paid exceeds the fair market value of the acquired assets, the difference is “goodwill,” which must be amortized against the acquirer's earnings for financial accounting purposes.

 If you are thinking of buying or selling a business, give us a call. (949) 645-7300.

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