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Things to Know About the Purchase or Sale of a Business

DeChello Law Firm LLC June 8, 2022

Business partner shaking hand and exhanging contractIf you wish to buy or sell a business in Connecticut, there are several factors that need to be taken into consideration, depending on whether you’re the buyer or seller. In both situations – buying or selling – you need to make sure that you do your “due diligence.”

Unlike consumer transactions when you’re buying a business or contracting with someone to purchase your business, there are no legal warranties in place if you are dissatisfied after the transaction.

If you buy a faulty product as a consumer, you can rely on time-honored legal protections and take the product back for a refund or replacement. If you buy a business without doing your full due diligence, there are no such ready-made warranty protections. You’ll need to go to court to prove you were somehow misled, even though you conducted the buyer’s due diligence.

If you’re selling a business, you should conduct due diligence on your own operations, liabilities, and potential sticking points before you engage a potential buyer, who will then demand a vigorous inspection of every aspect of your business. As the Boy Scouts motto goes, “Be prepared.”

Whether you’re a buyer or seller of a business in or around North Haven, Connecticut, or anywhere in North Haven County, contact the corporate and business attorneys at the DeChello Law Firm LLC. 

We have been helping clients for decades navigate issues related to business acquisitions and sales and protecting them against unanticipated problems. Don’t leave anything to chance. Let us review every aspect of the deal you’re about to commit yourself to, so you don’t end up with buyer’s or seller’s remorse.

Types of Business Purchases

Whether you’re a buyer or a seller, there are basically two methods of transferring the ownership of a business. Neither one should ever be undertaken without the guidance and knowledge of experienced attorneys. These two methods are:

Asset Purchase: In an asset purchase agreement, the buyer basically purchases specific assets of a company, which can include equipment inventory, accounts receivable, accounts payable, lease of the business premises, and sometimes takes an assignment of key contracts with customers IT software licenses. Employees of the seller are typically hired on a case-by-case basis depending on the buyer’s needs. A buyer should take care to ensure that the assets are free of liens, including obtaining a State Tax Clearance Letter to protect against a statutory lien for unpaid employee, sales, or other taxes of the seller.

Stock Purchase: If a buyer chooses to take over control of the company by purchasing its stock, the transaction generally includes the assumption of all assets and liabilities such as loans, impending lawsuits, employee contracts, and the like. A stock purchase agreement should address the price per share, the number of stock certificates exchanged, financing, and more.

Of course, neither type of transaction is as simple as its basic definition. Other issues to be negotiated and resolved include the business’s trade name, its customer list, its trade secrets (if any), licenses, legal issues, labor agreements, and regulatory compliance. Critically important are the representations and warranties of the seller and the indemnification provision to protect against unknown liabilities of the company and seller.

What to Do If You’re Selling a Business

This returns us to due diligence. A prospective buyer is going to want to examine your accounting books and other records. Their goal, of course, is to determine what your business is truly worth. 

You need to be prepared for this. Start by organizing your tax returns, bank statements, and other financial records. You should be able to present three years’ worth of these records to show a proven track record.

If you’re a corporate business structure, you will need to provide minutes from directors’ and shareholders’ meetings, along with articles of incorporation and bylaws in addition to accounting and other documents.

You may also want to examine your business bloat; in other words, see if there is inventory that can be reduced, or employee staffing levels that can be streamlined. Anything you can do to increase your profits before a sale will increase the value of your business. You will also need to determine a value for your business after you have taken streamlining steps to make it more attractive to a buyer. You may wish to get a third-party valuation that is reputable or hire a business broker or investment banker to advise on the value of your business and help with the sale.

Assemble a team to help with the due diligence process of the prospective buyer. This team can include key managers, accountants, HR representatives, board members (if applicable), and other key players with vital insight into the business. A point person can also be appointed to head up the team. Be sure to obtain a non-disclosure agreement before giving a buyer any due diligence information.

Most of all, make sure you have an experienced business transaction attorney, or team of attorneys, to help you with every step of the process.

What to Do If You’re Purchasing a Business

Again, due diligence is the operative term and concept if you’re seeking to purchase a business. You will want to do a complete examination of all records – accounting, inventory, personnel – as well as any contracts or agreements the business has with outside vendors or providers. Don’t limit yourself to one year’s worth of records. As mentioned above, three years’ worth of records is the standard.

Your due diligence should not be confined to financial, personnel or inventory records, but should also consider company culture, compliance with government regulations, customer satisfaction or issues with the company, and of course, any legal issues such as impending or ongoing lawsuits. Reputation is another area to delve into.

Check social media and do online searches to see what others think of the business. Interview employees as well to gauge what they think of the company and its management.

To discover any undisclosed liens and potential claims against the company, you can conduct a Uniform Commercial Code (UCC) search with the Connecticut Secretary of State and a court search for pending litigation claims. Liens against a company by lenders and others become a part of the public record that can be searched.

Rely on Skilled Legal Counsel

Whether you’re a buyer or a seller, you should seek legal advice from experienced attorneys from DeChello Law Firm LLC at every step of the process. Either transaction will have serious long-term consequences, and you want to make sure that your rights and interests are fully protected.

If you’re looking to do a business transaction in or around North Haven, Connecticut, contact the experienced corporate and business attorneys at the DeChello Law Firm LLC. We will advise you every step of the way with an eye to protecting your interests and preventing any unforeseen setbacks. hiccups, or challenges.