When buying or selling any business, the first question to ask is what kind of entity is currently operating the business and what is being sold: the entity itself or just the business’ assets? If the business is currently being operated as a sole proprietorship or partnership, the purchase will be from the individual owner or owners, and essentially it will be an acquisition of the “business”, meaning all the assets of the business. This can include a DBA (“doing business as”) or fictitious business name, which is the right to use a trade name in the county. If there is a formal entity operating the business, such as a corporation or LLC, both the buyer and seller have to consider whether all the shares or interests in the entity or simply business assets owned by the entity are the subject of the sale. In the latter case, typically the seller will want to keep the entity for their own future purposes or will simply dissolve the entity and move on.
If the buyer is acquiring the company itself, a well-drafted purchase and sale agreement is essential, so that it can be clearly stated that the buyer is not responsible for the debts and liabilities of the company prior to the buyer’s acquisition of the company. The company will remain responsible for those liabilities, as it was the company (not the seller) that originally incurred that responsibility, but the buyer can require that the seller assume those liabilities under the purchase agreement. That way, if an issue arises with the company where the liability was incurred prior to the sale date, the buyer can sue the seller and require the seller to pay for such liability.
Under this type of transaction, performing due diligence on the company is also important for the buyer to undertake, by reviewing the books and records of the company and inspecting its equipment and other assets prior to consummating the sale. A due diligence period can be built into the purchase transaction, so that the buyer can review the company and its status prior to finalizing the transaction. In addition, a certificate of good standing can be provided by the seller to demonstrate that the company is in good standing in the state in which it was incorporated or organized, and all other internal corporate records (articles of incorporation or organization, bylaws, minutes, resolutions, shareholder or operating agreement, statement of information, etc.) should be turned over to the buyer.
Conversely, in an asset sale, only a list of the assets being transferred is required. This can include tangible assets, such as equipment, furniture, supplies and inventory, as well as intangible assets such as trade names, branding, customer lists and goodwill, which is the “reputation” of a business considered to have a quantifiable value. A list of assets should be attached to the purchase agreement in all types of purchase transactions, so it is clear to all parties what the assets of the business are as of the closing date.