Buying a business - Physical execution, not the usual what its worth

Looking to purchase a business/product line and hoping someone can fill me in on what the actual execution process of purchasing it looks like. Not worried about the evaluation etc, I got that figured out.

My concern since I want to keep the name, is how to ensure I do not get any unwanted baggage a few months down the road. (bill collectors, pending lawsuit etc)
For example when you purchase real-estate you have an agent that does all the fancy paperwork, and the escrow company that confirms the title is clean and clear, no liens etc, whats the equivalent when buying a business.

Its not a huge chunk of money, I would be paying cash no bank needed.

Little background:
I would be taking over the product line along with it would come the digital CAD and CAM data, a few fixtures, current inventory, website etc.
No employees, machines, or lease agreements etc.

Hoping I don't have to go spend half the business price in lawyers fees.

Still need to talk exact details with the seller, but looking for some background before going into that conversation.
Do I just purchase the physical items, and amend the name slightly so the public thinks its the same company, but to debt collectors I have no ties.

I bought a business like that.

I used a lawyer for an non compete, but for the sale the seller was an LLC and I bought the DBA they used. I didn't change a thing except paperwork now said " Garwood's LLC DBA business name here"

I had some minor old warranty stuff and hiccups that popped up. Most of it was piddly stuff and I just took care of it, but there were a few bigger problems that I explained this is a different company and I cannot do anything for them.

In another instance I made a deal with a large aftermarket automotive manufacturer to take over several of their product lines. They were being sued for patent infringement by a competitor. I hand wrote a contract saying I accept all liability for the products and they just gave me everything. I figured my net worth wasn't worth the lawyer fees to sue me. It worked. The lawsuit was dropped and I ended up with a few hundred grand in new inventory.

So in my opinion if you might appear like a worthwhile target to a team of lawyers then you should cover your ass.

I think if you are asking the question you probably don't have anything to worry about. If you did it would not be a question.

I'm guessing you don't have a purchase contract in place.

Is there actually a company you're buying, as in an established corporate legal entity?

If the seller was just sole proprietor then there isn't really a "business" to buy. You're just buying a domain name, a website, and some information.

If there is an actual legal entity, then it's ideal for the buyer generally to make a new legal entity, and then buy the assets from the seller. Then the seller keeps the old legal entity, and it's up to the seller to wind it down. A lawyer should be able to draft up an agreement for the purchase of the business, and get it all structured to go into your new corporation. Since the seller keeps the legal entity, they should keep any residual legal risks. You'll just own the forward going risks.

From the seller's perspective it's better to sell the corporation, as any gains on the sale are capital gains and taxed less than regular income. The tax treatment makes this a point of negotiation, so you'll have to get that sorted out in the purchase contract.

adamm said:

If the seller was just sole proprietor then there isn't really a "business" to buy. You're just buying a domain name, a website, and some information.

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Kids these days

Garwood said:

I figured my net worth wasn't worth the lawyer fees to sue me.

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This is how america really works. No one will ever spent 100k to sue for 50k. Oh wait, that's what happens in patent disputes, but generally, it has to be worth it. If you do it smart, and separate the business from anything of any real value, it's hard to really loose.

The bottom line is it's really hard to fully protect yourself. If something really does go bad and the lawsuit names john does A-Z, it will bring you into a lawsuit, you can be removed from it, but will cost at least some money.

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In real estate the term is title insurance. My brothers co-worker bought a house and the title insurance tried to void the sale latter when it came out the seller had forged his ex-wifes signature. The insurance had to let the new owner keep it and the seller's had to settle in court.
Bill D

Bill D said:

In real estate the term is title insurance. My brothers co-worker bought a house and the title insurance tried to void the sale latter when it came out the seller had forged his ex-wifes signature. The insurance had to let the new owner keep it and the seller's had to settle in court.
Bill D

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Be aware title insurance is only valid for the purchase price. Improvements or increase in value are not covered.

Its way to complicated to answer in few paragraphs....educate thyself is the best advise. I know that sounds glib, but for the unconsciously incompetent (don't know what you don't know) there is just too much of a variety of ways to whacked to write out a list. Lawyers or accountants experience with M&A (waste of time unless they are) are expensive. I don't use an accountant for M&A (you better know that aspect well enough your self if you expect to buy and run a business) and try to keep lawyers to hard legal stuff - final documents (after I've negotiated the deal), registrations, checking for clear title etc.... else you get a 6 figure bill.

Your best and first line of defence is to do an asset deal vs a share deal. This sounds like what you are already thinking of, It leaves all (and unknown) liabilities not specifically assumed in oldco. You don't have to change the name, the intangible assets are assets and of course you would include them - like brand, name, IP, url, phone number, etc. When I've done this, I use the same name but change Ltd to Inc or Corp or just leave off all together and make a division of a company using the original name. i.e buying ABC Great Parts Inc could become ABC Great Parts as a trade name and legally be ABC Great Parts a div of 1234 Inc. That still requires the purchase of the name, but there are some advantages to being able to clearly distinguish newco from oldco

If the company you are looking to buy kept a minimally competent set of accounting "books", every single transaction and every single dollar should be right there.

Thus, there can be no hidden debts or lawsuits from the past that can sneak up and bite you.

I wouldn't want to purchase any kind of company or product line if the accounting and record-keeping were anything less than top-notch.

As far as getting sued for product already out there after you buy the company/product line, that's a tough one. Probably want to consult an attorney who has dealt with corporate buyouts...

I know in the mining industry, when you buy a mine property, you assume all liability for the property, both before the purchase and after. This doesn't indemnify prior owners though, as they are usually named in any legal actions...

ToolCat

QT:[every single transaction and every single dollar should be right there...]

if the seller has not fudged the book perhaps by using extra workers paid by cash..and so actual production can not be done with the numbers in the books.

Good to case out a business if you can, count the workers and see the production.

In a small business..the owner may be working 15 hours a day to make stated numbers.

cnctoolcat said:

If the company you are looking to buy kept a minimally competent set of accounting "books", every single transaction and every single dollar should be right there.

Thus, there can be no hidden debts or lawsuits from the past that can sneak up and bite you.

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whoa, there is a huge list of potential material liabilities that can be for large $$$ but do not appear in an accounting record: warranties, guarantees, supply agreements, commission agreements, contracts and commitments all of which can ruin your day. You also have no idea of omissions: financial promises made etc that they didn't put on the books. Of course everything on the books is visible....its the stuff not there that will side swipe you. Its highly problematic to take the position that it looks like their accounting is professional so there can't anything out there to surprise me. Its in essence taking a "just trust me" from the vendor. And a lawyer is going to be challenged advising on existing product liability - how can they? The skeletons in the closet metaphor means possible scary unknowns lurking beyond anyone's visibility

As a buyer always do an asset deal if you can. The only reason a buyer doesn't do an an asset deal is because of the seller's insistence on a share deal, usually because they are adversely affected by taxes on an asset deal.

Buying or Selling a Business

To be safe when buying or selling a business, it's wise to do it under the rules of the Bulk Sales Transfer Act in your state. This requires publishing notice to all parties involved, say vendors, material suppliers, debtors and creditors. The point is to make sure that everyone involved knows that the business is changing hands.

From Google:

What is a bulk transfer of goods under the UCC What are the rules for a bulk transfer?

The bulk transfer law is a law to protect business creditors. It provides that if a buyer of a business notifies the creditors of the seller in advance that it is buying the seller's assets, then the buyer will not be liable to those creditors for the debts and obligations of the seller.

How many states have bulk sales laws?

Because the Uniform Commercial Code is adopted in all 50 states (though only partly in Louisiana), almost every state had a bulk sales law.Jun 29, 2020

Insert said:

Little background:
I would be taking over the product line along with it would come the digital CAD and CAM data, a few fixtures, current inventory, website etc.
No employees, machines, or lease agreements etc.

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Then you're not buying a business. You're buying a handful of assets (physical and digital), a customer list, and a trademark. That's preferred anyway. You don't want someone else's entire business, i.e. baggage.

Get an attorney to draft up a contract. This should only take a few billable hours.

Buying or selling a business has many potential pitfalls.

Asset deals limit much of the unknown liability but have limitations related to doing business as the previous business. If you want to retain the employees, they must be transferred to the new business. Suppliers or customers may be hesitant to continue under the new ownership. The seller-owner typically has much of the know-how locked away in his head.

The business is usually valued by the free cash flow generated by the business. For small businesses, the most common method is to define the Sellers Discretionary Earnings or SDE. There are always debates about costs to exclude or include. In bigger businesses, the value is typically EBITDA.

Sellers expect a premium or multiple for the cash flow stream. The multiple is low (1 to 2.5) for very small businesses that are low margin, dependent on the owner’s skills or dependent on a few customers. The number is about 3.5 for a business with a couple million in sales with respectable margins and some degree of redundancy in people, products and customers. For diversified companies over 5 million, the multiple is typically somewhere between 4 and 7. The multiple can go very high for rich companies with high margins and technical advantages.

There are many hybrid models. Sometimes fixed assets are a factor for companies possessing a lot of valuable machinery. Inventory might be included or purchased separately.

Real estate is almost always separate. You either need to move the assets, buy the real estate or negotiate a lease.

Make sure you know what you are buying. You should expect all the assets including the machinery, know how, programs, websites, office equipment, phone numbers, etc. Spell it out.

Cash and cash equivalents are typically left to the seller. Be prepared to immediately inject working capital back into the business.

Hire an experienced business advisor or knowledgeable accountant to help with the valuation.

Hire an experienced attorney to prepare a proper asset purchase agreement and associated documents such as noncompetition agreements or transition services agreements.

The professional services are cheap in the grand scheme of the deal. Getting it wrong can be devastating.

I am the king of DIY, I even have helped friends with legal matters ages ago when lawyers failed them.
Considering that I would pay a lawyer that specializes in like transactions, he or she will know all the possible pitfalls.

whoa, there is a huge list of potential material liabilities that can be for large $$$ but do not appear in an accounting record: warranties, guarantees, supply agreements, commission agreements, contracts and commitments all of which can ruin your day.

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I get what you're saying, but then again, anything you listed should be written down somewhere. If not, then it's the typical half-ass business, of which you probably don't want to buy.

If it is written down and formalized, it would be a crime for the current owners to not divulge all.

If the current owner(s) have verbal contracts--meaning it's not written down, signed, or formalized in any way besides verbal, then it's 100% on them.

Verbal contracts don't mean jack, and thus the new owner wouldn't be legally liable for any handshake agreements made by the previous owner.

Otherwise the potential buyer has to weigh the impact and cost of the liabilities included with the business, be it warranty work, long-term contracts, employee agreements, bank notes, etc.


ToolCat

In California if you buy a business that dumped chemicals in the back storage lot or oil tanks leaked etc watch out. When it eventually gets found out by a new buyer or it goes by ground water to a well somewhere else they will come after all the previous owners for cleanup costs.
Every time a gas station is sold the tanks are pulled, soil is tested to prove no leaks/contamination then new owner puts in new tanks.
Bill D

You guys are correct, talked it through with the current owner, and it would be an asset sale, so many of my big scary concerns go away.

Anyone have an attorney they could recommend ? Preferably in Southern California, but open to others.

Insert said:

You guys are correct, talked it through with the current owner, and it would be an asset sale, so many of my big scary concerns go away.

Anyone have an attorney they could recommend ? Preferably in Southern California, but open to others.

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If it is just an asset sale ( which is best ) you don't need an attorney. It is like buying a car or horse or milk cow. Just make sure you get some kind of bill of sale. Land sale needs to go through title deed company. For tax purposes sole proprietor is best. For liability purposes, business trust ( overseen by trustees ) or llc ( overseen by the state ) is best. I ran SP for twenty years before going llc. Then I did it so I could make my children partners instead of employees. Save's you from paying employment taxes on them.

Insert said:

Anyone have an attorney they could recommend ? Preferably in Southern California, but open to others.

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If you like San Luis Obispo, yes.