The Younger Law Blog

Buying & Selling a Business

Issues to Consider When Buying a Business

When contemplating purchasing a business, you have some major issues to sort through, including:

Type of Deal. What kind of deal will it be — purchasing the assets of the business or purchasing the stock?

Confidentiality. If the seller will be sharing confidential information, such as financial statements and customer lists, the buyer will probably be asked to sign a Confidentiality Agreement.

Letters of Intent. Consider whether signing an Acquisition Letter of Intent makes sense before you invest a great deal of time and money.

Due Diligence. Make sure you have thoroughly checked out the business you're buying — its financial performance, assets, liabilities, contracts, employees, and more. Click here to view a sample Due Diligence Checklist.

Definitive Agreement. You'll need a comprehensive definitive agreement setting forth the terms of the acquisition.

Value of a Business

A business like any other asset, is worth what a buyer is willing to pay, and what an owner is willing to accept. Buyers are primarily concerned with the cash flow that the business generates, and the corresponding return on their down payment. To accurately determine the true worth of a business, the company's accounting reports, prepared primarily for tax purposes, must be restated to reflect the true financial performance of the business.

Most business are sold as "asset sales" versus selling as stock transfers. This means that the business owner will retain certain assets and may pay certain bills. Typical examples of assets retained are cash in the bank, vehicles, life insurance policies, etc. When an expert is determining the price a business should produce on the open market, the report that is prepared is a business valuation. A business valuation takes into consideration the fair market value of the assets and the ability of the business to earn money, or "going concern" values. Many factors must be considered when arriving at the market value. Business appraisals take into consideration the value of the business totally intact. This type of report is usually prepared for trusts, inheritance taxes, estate planning, partnership buyouts, divorce settlements, and other non- traditional sale of business application. Certain standards must be met for such a report to comply with the requirements of the Internal Revenue Service, state and federal courts.

Considerations when Buying a Franchise

Buying a franchise is different in important ways from buying another business. You will be entering into a long-term relationship with your franchisor in which you will have to rely on it to a large extent for the success of your own business. You will not be allowed to run your business as you think fit. You will be obliged to run it precisely in accordance with your franchisor's System.

Franchising does not remove all risks, which include:

  • Inadequate pilot testing

  • Poor franchisee selection

  • Bad structuring of the franchise

  • Under-capitalization of the franchisor or franchisee

  • The franchisor may run its business badly

  • Competitive risks

In assessing a franchise opportunity, you must carefully consider the following critically important issues:

  • Examine franchisor's financial position in great detail

  • How thoroughly has it market tested the business?

  • How well the System works in practice?

  • Is the business temporarily fashionable?

  • Ask an experienced franchising solicitor to check the franchise agreement - an accountant should check the business plan

  • Ask several existing franchisees about their experience

  • You must appreciate that there is always the risk that you might not be successful in the business, despite the success of others

The legal basis for the relationship is the franchise contract. Normal contract features include:

  • Identification of the franchisor's proprietary interests

  • Nature and extent of the rights granted to franchisee

  • Term of the Agreement and Renewal - the term must be long enough for you to recoup your investment and make a return from building up the business. Most franchise agreements provide a qualified right of renewal.

  • Fees Payable - initial and ongoing

  • Extent of the services provided by the franchisor, both initially and on a continuing basis.

  • Initial and continuing obligations of franchisee - range from business set-up complying with the franchisor's requirements, to undertakings to comply with operating, accounting and other administrative systems. After training to operate the business successfully, you will be subject to non-compete and confidentiality obligations.

  • Operational controls imposed on franchisee - intended to ensure that operational standards are properly maintained. The failure to maintain standards in one unit can harm the entire network.

  • Sale of the business - can you build up the business and sell with a capital gain? However there will always be controls. If none, that should be a matter of suspicion!

  • Death of franchisee - can the business be preserved as an asset and sold/ taken over by your dependants if they can qualify as a franchisee?

  • Termination and consequences - your breach of the agreement may lead to its termination! You should have the opportunity to put right minor remediable breaches. You will lose the use of the trade mark/trade name, and other rights owned by the franchisor. You will be under an obligation for a reasonable period not to compete with the network, and prohibited from using the franchisor's System and methods. The franchisor may have options to buy the business. Valuation provisions should be carefully checked! LLC Buyout Agreements Considerations When Having a Multiple Member LLC

Every business needs a buyout, or buy-sell, agreement to decide what will happen if an owner wants out.

Many LLC owners neglect to create buyout agreements, but buyout provisions are critical when you co-own an LLC with other members. A buyout, or buy-sell, agreement states what will happen when one member wants to leave the company, or worse, dies, goes bankrupt, or gets divorced.

What Is a Buyout, or Buy-Sell, Agreement?

Contrary to popular belief, buy-sell agreements are not about buying and selling companies. Instead, they are binding contracts between co-owners of a business that govern what will happen when an owner wants to leave or a new owner wants to join. Because of this confusion over terminology, we will use the term "buyout agreement" from here on.

A buyout agreement controls the following business decisions:

  • Can a departing member force the other members or the LLC to buy him or her out?

  • Who can buy a departing member's share of the business? (This may include outsiders or be limited to other LLC members.)

  • What is the price for a member's interest in the LLC?

  • What other events can trigger a buyout?

A buyout agreement is a sort of "premarital agreement" between you and your co-owners: If your happy union doesn't last, the buyout agreement spells out, in advance, what will happen to the business you own together.

What Events Are Covered Under a Buyout Agreement?

Typically, the events that trigger the buyout of a member's interest under a buyout agreement are:

  • a member's retirement or resignation

  • an attractive offer from an outsider to purchase a member's interest in the company

  • a divorce settlement in which a member's ex-spouse stands to receive a membership interest in the company

  • the foreclosure of a debt secured by a membership interest

  • the personal bankruptcy of a member, or

  • the disability, death, or incapacity of a member.

Why You Need a Buyout Agreement

It's a huge mistake to ignore the fact that sooner or later your circumstances will change. Here's how the buyout agreement can help in several situations.

Member leaves. The odds are good that a member will want to leave the company before the other members are ready to sell or close the business down. Without a buyout agreement, the LLC might be automatically dissolved when one member leaves, forcing the assets to be sold and divided among the LLC members. If the other members wish to continue the business, there are no rules determining in advance whether and how departing members will be bought out, or for how much. This can lead to serious personal and business discord -- perhaps even court battles and the loss of the business.

A new member wants to join. A buyout agreement also places controls on who can buy a membership interest in the company and how new members can join your ranks. Without this provision, another member could sell his or her share to someone you would rather not be in business with.

Encourages a discussion of expectations. In addition to avoiding potential problems in the future, writing a buyout agreement has a very real immediate benefit: It will force you and the other members of your ownership team to talk about your hopes and expectations for the business. This type of honest, open communication will put your LLC on the right track from the very start.