Forming an LLC or Corporation to Receive the Purchased Assets
If the purchase will be structured as an asset purchase, which is generally the case, the buyer will want to form an LLC or a corporation to receive the purchases assets. This means that the buyer will need to choose a name for the new business (even though the name of the target business will likely be used as a DBA), register the business with the Secretary of State, develop all of the necessary legal agreements to address the internal affairs and operations of the business, apply for all appropriate licenses and permits, draft new employment and independent contractor agreements, etc. These tasks can take a significant amount of time to address and is often overlooked by many buyers. Therefore, it is important that buyer allocate the appropriate time to get its house in order (so to speak) to receive the assets prior to the purchase of the business as to not to unnecessarily delay the transaction.
Buyer’s Due Diligence
There are many items that need to be reviewed and addressed during the buyer’s due diligence period. For example, a buyer will want to receive five years’ of financial statements, including balance sheets, income statements, cash flow statements, etc. Additionally, the buyer will want to review all customer and third party contracts, analyze customer reviews, review the target companies intellectual property portfolio, review all employment agreements and benefit plans, review all licenses and permits, assess the target company’s inventory, and inspect other business assets. The buyer will also want to interview employees and inspect the premises to ensure compliance with the commercial lease, among other items.
Valuing the Business: Purchase Price
After due diligence, the buyer will want to determine if the initial valuation of the target company was appropriate. Generally speaking, the purchase price stated in the letter of intent is negotiable and made be adjusted after completion of buyer’s due diligence. At the end of the day, a business will sell for an amount that the buyer is willing to pay and a seller is willing to accept. The buyer will want to then determine how the purchase price will be paid. Will the seller be willing to finance a portion of the purchase price whereby the buyer will pay in installments over a period of time? Will the purchase price be contingent or certain earn out markers? Will the purchase price be paid in one lump sum? These are all considerations a buyer should be thoughtful of during the preliminary stages of the business acquisition.
One of the most often overlooked issues during the purchase of a business is the target company’s intellectual property. The intellectual property rights of the target company may consist of copyrights, patents, trademarks, trade secrets, licenses, and domain names. It is critical that the buyer address the target company’s intellectual property before buying the business. It is not unusual for a buyer to ignore the company’s intellectual property during the due diligence phase and later be subject to expensive infringement litigation. Lesson – always check to see if the company’s intellectual property rights are registered and protected before buying a business!
Post-Closing Transition Services
It is important that the buyer consider the seller’s transition services post-closing. It is generally the case that a buyer will purchase a business and not have much experience in the specific industry or marketplace. For that reason, it is important that the buyer negotiate certain services to be provided by the seller after the purchase of the company has been consummated. These transition services may be paid or they could be compensated as part of the purchase price. Thus, in order to position the company for continued success, the buyer should request that the seller or its key employees stay on for a period of time and the closing of the transaction.
Call Our Charleston Corporate Attorneys
Our Charleston corporate attorneys have significant experience in handling a wide range of business transactions, including representing individuals and businesses selling a business in South Carolina, in a wide range of business industries. To schedule a consultation with one of our corporate lawyers today, please contact us online or give us a call at 843-564-5115.