Business law

BUYING A BUSINESS IN DENVER, COLORADO.

MY BACKGROUND.

I have been practicing law for more than thirty-five (35) years and I am an Inactive CPA. I have helped many people buy many types of businesses. I will help guide you, legally and practically, from start to finish for the purchase of a business.

FINDING A BUYER.

The next most difficult task is to find a buyer who is willing to pay you the value of your business and who has the financial resources to purchase your business.

VALUATION OF THE BUSINESS.

You must be very comfortable with the purchase price for the business. You may ask the seller how he/she valued the business. You should take the necessary steps, and consult with the experts in valuation of businesses as you deem appropriate, to make sure the purchase price is reasonable and acceptable to you.

USING A LETTER OF INTENT.

If you think that you and the seller will be able to agree upon the terms of your purchase, a good approach is to use a letter of intent (“LOI”). A LOI is an excellent document to see if you and the seller agree upon all of the material terms of the transaction without you spending money on attorney fees having me prepare an agreement only to find out the seller is not agreeable to the material terms or you and the seller have had a miscommunication. After you and the seller agree upon the terms of the LOI, I then use the LOI as an outline to prepare the agreement. While the agreement that I prepare will protect you, the agreement that I prepare is not one-sided in your favor because the agreement must reflect the understanding between you and the seller and be workable for both you and the seller. The LOI that I prepare expressly states the LOI is not binding on you or the seller and there is not an agreement until you and the seller sign an agreement for you to purchase the business.

NON-DISCLOSURE AGREEMENT.

A seller will not disclose very much to you until you sign a non-disclosure agreement, which is a reasonable request from the seller. We still need to carefully review any proposed non-disclosure agreement that the seller would like you to sign. Even with you signing a non-disclosure agreement, the seller will still not disclose sensitive and confidential information like customers’ names until closing. In the agreements that I prepare, I usually list the number of customers and other information without listing the names of the customers and then at closing the names of the customers and the contact information is given to you.

YOU WILL PURCHASE THE ASSETS OF THE BUSINESS AND NOT THE STOCK OR MEMBERSHIP INTEREST.

You will purchase the assets of the business. The reason that you purchase the assets is if you purchase the ownership interest (membership interest if it is a limited liability company or shares if it is a corporation), the entity remains the same and only the owners change. Therefore, if there is an unknown lawsuit that is filed after closing or there are unknown liabilities, you have paid a substantial amount of money to own a business who owes liabilities that you did not know about.

By purchasing the assets, your company is not liable for any unknown liabilities or claims.

Further, I believe you will find when you talk to your CPA that it is better from an income tax perspective to purchase the assets.

YOU WILL FORM A LIMITED LIABILITY COMPANY TO PURCHASE THE ASSETS OF THE BUSINESS.

You will most likely form a limited liability company to purchase the assets because nearly all entities that are formed now are limited liability companies and not corporations. I generally recommend a double limited liability company to provide you with additional financial protection. I will explain that concept to you some more when we talk or meet.

RETAINING A GOOD CERTIFIED PUBLIC ACCOUNTANT.

Although I am an inactive Certified Public Accountant and understand income tax concepts, I do not provide any income tax advice to my clients. You will need to retain a good CPA to provide you with all of your income tax advice.

One area the CPA will help you with is the allocation of the purchase price among the assets. The income tax treatment for some assets is different than other assets.

AN IMPORTANT ISSUE IS WHETHER YOU PAY CASH OR ASK THE SELLER TO FINANCE PART OF THE PURCHASE PRICE.

Sellers always like to receive all cash for the sale of their business.

Some purchasers like to have the seller carry back a portion of the purchase price for a period of time to make sure nothing “comes out of the woodwork,” and to make sure that what the seller represented and warranted is true.

A sale is much more complex if it is not a sale and the seller carries back part of the purchase price. Sellers, reasonably, will require collateral for the amount that is carried back. There will be a promissory note, a security agreement, and a UCC-1 filed with the Colorado Secretary of State for all personal property that is collateral. If real property is collateral, a deed of trust is recorded in the clerk and recorder’s office in the county in which the real property is located. You and the seller must also negotiate the terms of the carry back. For example, what is the amount of interest, will there be payments, when is the loan due, is there a default interest rate, and whether there is a late fee that will be charged. Although a carry back is more complex, it is very doable and the benefits outweigh any negatives.

TERMS TO INCLUDE IN YOUR AGREEMENT.

Your agreement will include the following terms and concepts:

1. Parties to the agreement.
2. Purchase price.
3. Amount of earnest money.
4. A detailed list of all assets that are being sold.
5. The allocation of the purchase price among the assets.
6. Whether it is a cash sale and if you carry back any of the purchase price, the specific terms for the carry back financing. I will attach all exhibits to the agreement that will be signed at closing for the carry back.
7. The buyer will require that you make the following representations and warranties:

1. The organization of your business (usually limited liability company or corporation) and the entity has the authority to enter into the agreement.
2. The agreement does not violate any agreement, any internal documents concerning your company, or any law or statute.
3. The company’s financial statements are true and accurate. I always attach as an exhibit to the agreement several years of income tax returns for your company and the year to date income statement and balance sheet. Therefore, after closing the buyer cannot state that what you stated about the company’s income and expenses is not accurate.
4. That there are no lawsuits pending and no known facts which could give rise to a lawsuit.
5. That all taxes for your company have been paid.
6. That you owe all assets free and clear, or if you do not, the lien against any asset will be paid at closing.

8. Closing date.
9. Terms of a covenant not to compete that you will sign, to include the number of years and geographic area. Colorado has a specific statute that governs covenants to compete that must be followed.
10. Whether you will stay on after closing for the transfer of the business to the buyer and if so, what the terms will be.
11. How you and the buyer will give notice to your customers that your business has been sold.
12. Dispute resolution. I generally recommend arbitration and I have a good paragraph that I include in my agreements.
13. Because of social media, I almost always include a non-disparagement paragraph in all agreements that I prepare.
14. A paragraph that states the agreement is the entire agreement between you and the buyer. After closing, the buyer may not try to claim you and the buyer had a “side agreement” not in the agreement.
15. A paragraph that if there is any ambiguity in the agreement, the ambiguity is not construed against either party. If this concept is not in the agreement, any ambiguity is construed against whoever prepared the agreement.
16. A paragraph that the State of Colorado laws apply to the agreement.
17. A paragraph how notices are given to each of you.
18. A paragraph that the prevailing party receives attorney fees and costs for any disputes.
19. A paragraph that if any part of the agreement is not enforceable, all other provisions of the agreement remain valid and enforceable.
20. A paragraph that your company and the purchaser will report the same allocation of the purchase price to the IRS. You do not want to be audited by the IRS because your company and the purchaser report the allocation of the purchase price of the business differently on your respective income tax returns.

I SHOULD PREPARE THE AGREEMENT.

I like to prepare the asset purchase agreement instead of having the seller’s attorney prepare the agreement for a few reasons. If I prepare the agreement, we make sure all of the concepts are included in the agreement that we would like to include. If the seller would like any changes, we are able to analyze what the requested changes are and why the seller is requesting the particular change. It will be more time efficient if I prepare the agreement (less attorney fees for you), instead of reviewing an agreement that the seller prepares and I comment on all of the changes that you and I would like, and then we have to follow up to confirm all of the changes have been made.

ATTACHING EXHIBITS.

I always attach all exhibits to the agreement that will be signed at closing so you do not arrive at closing and have to negotiate the form of the documents at closing. Closings are much easier and cleaner if all documents that will be signed at closing are attached to the agreement.

CALL ME.

If you are looking at a business to purchase, please call me at 303-782-4900 and we will discuss how best to proceed to purchase the business.