Business Purchase and Sales
Indiana Business Acquisition and Sale Attorneys
At Efron & Efron, in Hammond, Indiana, our attorneys have guided many clients through the purchase and sale of businesses. Sometimes the transition occurs due the sale of the business or its assets from one owner to another. More often, we have helped our clients buy or sell existing business, or the assets of those businesses. These acquisitions may involve a single seller and a single buyer or the sale of a business to a public company. Although, we do not represent public companies, we possess experience selling some of the businesses of our most successful clients to public companies.
There may be business deals that can be safely written up on a restaurant place-mat, but the sale of a business is not one of them. The "keep-it-simple" principle has its limits. To protect your legal and financial interests, you need to put together a detailed sales contract for you and the buyer to sign. Here are some items to consider for inclusion in the sale contract. An overview of the acquisition process reveals the many issues that will arise.
Starting the Process: The sales process begins either when a company makes a conscious decision to explore the market, or when it receives an unsolicited expression of interest from a third party. Shareholder value is maximized when a company is well-positioned for sale, and its financial, legal and accounting functions are in good order and easily understood by third parties. This can be best achieved by dealing with issues in advance of the sales process so problems do not become larger either before or during the sale process.
Due Diligence: In selling a company, the persons controlling the seller will go through a process called "due diligence". Due diligence is a comprehensive strategic, financial, and legal investigation by the buyer and its advisors respecting the target company. Prior to discussing transaction specifics, some preliminary due diligence will probably be done by the buyer. Most of this will be strategic and/or financial due diligence. If the buyer is a strategic buyer, it may focus on what strategic value the target company will provide to it (for example, elimination of a competitor, access to new customers, or acquisition of a complimentary product line). If the buyer is a financial buyer, it may focus on the target company's financial condition and operating history so as to satisfy itself that it will receive a reasonable rate of return on its investment.
Before a prospective seller discusses a possible deal or provides any information, it should make sure that its counsel drafts a Confidentiality/Non-Disclosure Agreement and that such agreement is signed by the prospective buyer. This is a different form of agreement than businesses typically have their employees sign respecting confidentiality. It should provide that not only will the information which is provided be treated confidentially, but that the existence of any discussions will also be so treated.
Form of Transaction: Once some preliminary due diligence has been conducted and it appears that a transaction is advisable, the parties must agree upon the legal structure of the transaction. There are three different ways which a prospective buyer can purchase a business:
Each of these forms of transaction has different strategic, legal, and tax implications. For example, generally a buyer will prefer an asset sale, which provides the buyer with tax advantages and allows the buyer to control to a better extent what liabilities are assumed. From the seller's perspective, however, an asset sale has the highest tax cost, particularly if the seller is a corporation which has not made a Subchapter S election.
Often the interests of the buyer and seller are divergent in structuring the form of the transaction, and it is important for a selling company to get good legal and tax advice before making a commitment to the form of transaction.
Letter of Intent: Early on after a determination has been made that a transaction would be advisable, consideration will probably be given to whether or not a letter of intent should be signed. Letters of intent, when used, can either be binding or non-binding. While it may be the intention of the parties to replace it with a more formal and comprehensive purchase and sale document, a binding letter of intent is an enforceable contract. A non-binding letter of intent, as to its non-binding provisions, requires the prospective seller to proceed with the prospective buyer on a good faith basis. Almost always, non-binding letters of intent contain some provisions that are binding, such as confidentiality provisions and a "no-shopping" provision that is usually requested by the prospective buyer (i.e. a provision which provides that the prospective seller will not have discussions about a transaction with any third party). It is important for a selling company to involve its professional advisors before anything is agreed to, since often letters of intent contain deal terms that cannot later be modified, even if the letter of intent is non-binding.
Additional Due Diligence: The buyer and its professional advisors will probably conduct additional due diligence after a letter of intent is signed or, in situations where a letter of intent is not used, after the parties have determined to proceed further after initial discussions have taken place. Here the due diligence will also deal with a myriad of legal issues. Some of these include determining that the selling company has no off balance sheet liabilities; that the buyer will have the benefit of the contracts and agreements to which the selling company is a party based on the transaction structure which has been agreed to and that the selling company is the owner of all of the tangible and intangible property used in connection with its business.
Preparation of the Definitive Agreement: A definitive buy-sell contract will be prepared. Usually this is prepared by the buyer's lawyer and the selling company's lawyer will make suggested changes. Usually there are many items that are negotiated, such as the following:
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