The Legal Aspects of Purchasing

or Selling a Business

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Selling or purchasing a business involves more than setting a price and closing date. There are a number of legal land mines that also need to be avoided.

Purchasing or Selling a Business

The Nissenbaum Law Group has a particular focus in representing clients who are purchasing or selling their businesses. The issues involved can range from collateralizing the purchase money loan for the sales price to assignability of the vendor contracts to estate issues as they relate to the owner’s receipt of an infusion of capital. It is vital that people who are currently business owners ready to sell, and those who want to be business owners seeking to buy, obtain legal counsel at the earliest possible point in the transaction.

The following are some frequently asked questions that relate to both purchasing and selling a business.

 

FAQ #1: What is the difference between a Letter of Intent (LOI) and a Memorandum of Understanding (MOU)?

Relatively none. Ironically, the most important thing that they have in common is that they can cause more harm than good.

At the outset, we should note that a Letter Of Intent (LOI) or Memorandum of Understanding (MOU) is nothing more than a barebones outline of some of the basic terms of the deal as they are proposed at the outset before a contract of sale is signed. The basic issue is that, subject to the particular state law restrictions (such as that jurisdiction’s version of the Parol Evidence Rule, a topic for another discussion), if the parties agree on the material terms of a transaction, but have not reduced their understanding to a formal contract, an informal outline of their understanding can be interpreted by a court as a substitute for that contract. In other words, it can be legally enforceable.

Obviously, that is a major problem, insofar as it means that a “deal written on a napkin over drinks” between the seller and buyer (usually without counsel) can effectively set forth the binding terms of the deal.

On the other hand, there is an obvious advantage to striking while the iron is hot; in other words, both parties need to avoid a situation in which their interaction is all talk and no action. The opportunity for a business deal that benefits both sides can be fleeting, and over the course of months such items as a downturn in the relevant market, a key vendor of the business going bankrupt or even the institution of a matrimonial action that impacts the seller’s or purchaser’s assets can upend the deal.

One way of handling this is to have an extensive disclaimer in the LOI or MOU clarifying that nothing said by the buyer or seller in the negotiations shall constitute a binding agreement. Second, it always makes sense to insist on having an attorney review the MOU or LOI before it is issued. Sometimes, that might result in the attorney replacing them with a more extensive— though still not binding—document called a “Term Sheet” which is essentially a bullet point list of the deal that is enhanced to include the appropriate legal framework and disclaimers.

 

FAQ #2: How should a potential buyer conduct its due diligence?

The key point to keep in mind in conducting due diligence regarding the purchase of a business is to involve the right experts at the outset. This generally includes (a) counsel to perform a “legal audit” to evaluate any pending or potential lawsuits, regulatory actions or alternate dispute resolutions matters, e.g. mediation or arbitration, (b) a forensic accountant to review the books and records, and (c) in certain cases, an expert in business valuations who can evaluate whether the business is both being sold for a fair price and is on the upswing or downswing.

 

FAQ #3: What is an earnout, and is it something that is typically constructive or destructive in regard to the deal?

An “earnout is somewhat analogous to a security deposit held by a landlord when they rent out commercial space. It involves holding back a portion of the payment for the purchase of the business post-closing. The reason it is held back is to give the business time to both acclimate to the purchaser’s approach and to allow the purchaser to verify that there were no obvious hidden flaws in the business that were not disclosed during the due diligence process. It is generally paid to the seller using a formula that involves benchmarks concerning whether certain revenue targets are later met. It can also constitute a fund from which a buyer can seek compensation if there are items that were promised but not delivered in terms of the sale.

 

FAQ #4: Is it better to have a business broker or to try to sell or purchase a business on one’s own?

The advantage of utilizing the services of a business broker is that they can serve as a conduit for amassing a number of available opportunities that a potential buyer might consider, rather than finding them all on their own. Further, the broker can often involve their own team of outside professionals who may assist in making the deal happen, such as real estate inspectors, regulatory advisors and forensic accountants.

The disadvantage of having a business broker is that they can put pressure on both sides to proceed with a deal that should involve more due diligence and consideration. Frequently, there are items that the seller and/or buyer may be only partially disclosing, and under such circumstances, being pressured to move forward can undermine a prudent analysis of what deal points still need to be explored.

For example, a seller may not be giving a candid summary of a regulatory change that they know through inside information is about to become public in six months and will radically reduce the value of the business. Likewise, the buyer may not be disclosing that they have a major credit issue that would prevent them from obtaining financing for the deal, rendering the entire transaction in doubt. Those and similar circumstances are the rationale for the parties to proceed in a deliberate fashion. Doing so may run counter to the business broker’s interest in closing the deal quickly (which, on the other hand, might ultimately benefit all parties under the right circumstances).

 

FAQ #5: Are there any differences I can anticipate if I purchase or sell a business in one state versus the other?

There are a number of considerations when comparing a potential business acquisition in one state versus another. The following are three examples.

First and foremost, an accountant should be consulted regarding the potential tax that may be applicable, either or both to the seller in regard to the net acquisition and/or the buyer’s future state tax burden relating to ongoing profits of the business once it is acquired. Second, the state regulatory framework may be more or less restrictive with respect to the business’ particular service or industry. This can include licensing requirements that may be applicable in one state but not another. Third, the employees of the business may be subject to state income taxes from their paycheck that may make it more or less attractive when seeking to hire new workers.

 

The Nissenbaum Law welcomes inquiries from persons who are planning on buying or selling a business.

The Nissenbaum Law Group encourages both buyers and sellers of businesses to contact the law firm regarding potential representation. Importantly, the firm particularly suggest that, if possible, this be done before the contract of sale—or even memorandum of understanding, letter of intent, or term sheet—is finalized.

PUBLICATIONS & PRESENTATIONS

Gary D. Nissenbaum, Esq.

  • Augmented Reality: Gotta Protect That IP, by Gary D. Nissenbaum, Esq. and Laura J. Magedoff, Esq., Apptentive, September 22, 2016
  • Profiled in: Gary D. Nissenbaum: Ace Gaming Attorney, by David Radd, Gamesauce, September 10, 2016
  • The Increasing Pace of Digital Change: Why Does Our Culture Always Seem so Blindsided?, Huffington Post, August 4, 2016
  • How to Sharpen Your Contract Clauses, Telemarketing Magazine, May, 1994
  • Panelist, New Jersey Trust and Business Accounting, New Jersey Institute for Continuing Legal Education, February 2021

 

Laura J. Magedoff, Esq.

  • Augmented Reality: Gotta Protect That IP, by Gary D. Nissenbaum, Esq. and Laura J. Magedoff, Esq., Apptentive, September 22, 2016
  • It’s All Smoke and Mirrors: State Smoking Bans and Theatrical Performances, AACT Spotlight, November, December 2008
  • Panelist, Intellectual Property Protection & Enforcement, New Jersey Bar Association Annual Conference, Atlantic City, NJ, May 2017
  • Presented Seminar, Business Contracts A to Z, National Business Institute, Newark, NJ, December 2013
  • Presented Seminar, 2014 Trademark Primer: Prosecution & Enforcement Strategies Every Attorney Should Know, NJICLE, New Brunswick, NJ, November 2013

PODCASTS

Gary D. Nissenbaum, Esq.

 

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Looking for advice?

We're here to help.

Contact the Nissenbaum Law Group to schedule an appointment at 908-686-8000 or feel free to use the following form to e-mail us. Please include as much information as you can to ensure that we are able to handle your request as quickly as possible.

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