Business Purchases & Sales
BUSINESS PURCHASES
& SALES
& SALES
BUYING OR SELLING A BUSINESS?DON'T GO IT ALONE.
A good Attorney is like good insurance
Are you considering purchasing someone else’s business? If so, you need to be very careful, as if not properly handled and documented, the purchase might become a nightmare that you never intended.
Generally, there are two (2) ways to purchase a business: (1) purchase the entire business, including BOTH the assets and liabilities (debt); or (2) purchase just the assets of the business without also purchasing its debt. In this latter scenario (purchase of just the assets), California law considers any purchase of more than half of a business’ inventory and equipment, as measured by fair market value, that is not part of the seller’s ordinary course of business, to be a “bulk sale.” If your purchase qualifies as such a transaction, and you do not comply with the requirements of California law regarding bulk sale transfers, you will become liable for the business’ debts even though if you didn’t intend to.
To avoid this, notice of the intended purchase should be given in compliance with the California Commercial Code. To accomplish this, a reputable escrow company experienced in bulk sale escrows should be used. Among other things, the escrow company will give “notice” of the intended transfer to all of the business’ creditors by recording a Notice in the County Recorder’s Office and publishing it in a newspaper of general circulation in the County where the seller is located. In addition, the Notice will be delivered to the County Tax Collector. Any creditor who becomes aware of the intended transfer of assets can place a claim into the bulk sale escrow, and be paid from the sale proceeds deposited into escrow. If the Notice is properly handled in compliance with the Commercial Code, creditors will be unable to pin liability on the buyer for debt which pre-existed the transfer of assets. In addition, the escrow company will perform other functions (e.g., obtaining tax clearance certificates from the Franchise Tax Board, Employment Development Department, and/or State Board of Equalization, as needed) necessary to complete the transaction. In these and other ways, using a good escrow company experienced in handling bulk sale escrows is important to protect the buyer from potential unknown liabilities resulting from the purchase of assets.
The other way for both buyers and sellers to avoid problems in bulk sale and other asset transfers is to use attorneys who are experienced and knowledgeable in such transactions. A properly-drafted, accurate and detailed Asset Purchase Agreement (APA) will specify terms which once agreed to, will eliminate misunderstandings and disagreements after the transaction has finalized. A good APA will avoid unnecessary problems, litigation and expense after the transaction has been finalized.
For example, if the APA includes an indemnification provision by which the seller agrees to indemnify (or reimburse) buyer for claims arising before the transfer of the assets, and a reciprocal provision is included by which buyer agrees to indemnify seller for claims arising after the transfer of the assets, in the event of such a claim, the liability will be very clear. A properly-drafted Bill of Sale transferring title to the assets is also a must.
In some transactions, documents in addition to the APA and Bill of Sale might also be necessary. When the buyer is not paying in full for the assets at the time of the transfer, and therefore needs payment terms, a properly-drafted Promissory Note, Security Agreement, UCC-1 Financing Statement, and sometimes also a Personal Guarantee (e.g., when the buyer if a corporation of limited liability company) are also important to protect the seller.
The bottom line is that although attorneys and escrow companies can be expensive, good, knowledgeable, and experienced attorneys and escrow companies can prevent unforeseen problems, litigation, and consequences, and cost in transactions of this type. While many clients learn this lesson the hard way (after it’s too late), some have the foresight to know that using an attorney is akin to purchasing good insurance. Used properly, a good business attorney can save you substantial money and headache.
The foregoing article should be relied upon for general informational purposes ONLY, and should not be construed as legal advice, as every situation is different, and slight variations in the facts of each case can alter the applicable law and result. To obtain legal advice for your particular situation, please contact Mr. Rollin.
"Accessibility to an attorney is critical; as technology has transformed business and communication, business owners must now solve issues and make decisions within hours (if not minutes). With these heightened expectations and demands, it is more important than ever for business owners have access to their attorney so they can quickly obtain counsel regarding their situation."
Harold L. Rollin, APLC
ADVICE
REPRESENTATION
Harold L. RollinA Professional Law Corporation
(559) 732-3600
815 West Center Avenue
Visalia, CA 93291
Office Hours:
Monday through Friday
8:30 am to 5:00 pm