When you buy a business, you purchase what is not known about the company.
- Has the business ever been involved in any lawsuits?
- Does the business from really have a good reputation or do they use unethical methods to obtain business?
- Is the business making a profit or are they cooking the books?
- How much inventory will you be purchasing?
- In what condition is the equipment?
- What are the state of any contracts?
There are dozens of questions and concerns that you need to be aware of. Investigation and research is vital before purchasing a new company.
If you plan on buying a business, it is critical that you hire an attorney and an accountant to perform due diligence. I would recommend looking back at least six years, because the statute of limitations of breach of contract in New York is that long. The idea here is to protect yourself from any type of liability and unnecessary litigation. My office checks all court databases to ascertain the status of any litigation. If you are purchasing intellectual property, make sure any trademarks are current.
In terms of accounting, if you buy of an existing business you may able to amortize things such as customer lists, goodwill and intellectual property. That is why I always recommend that you speak to an accountant.
Structuring the Purchase of the Agreement
Basically, there are two ways that you can buy a company:
- Asset Purchase;
- Stock Purchase.
In most cases, you will be better off purchasing the assets. There are three big benefits to buying the assets and not purchasing the stock:
- Tax benefits. With an asset purchase, you can give different purchase prices among the various pieces of the company. For example, certain equipment can be deducted immediately so you may want to assign a greater price for those assets.
- You can choose not to acquire liabilities of the business you wish to buy.Perhaps the company failed to pay a supplier for goods it ordered two years ago. The statute of limitations on a breach of contract lawsuit is six years, so you could be hit with a lawsuit four years after buying the company.
- You don’t have to buy every asset of the corporation. It could be in you best interest to buy only the profitable portions of the company.
Sometimes you are not given the choice of how a business sale could be structured. Many business that are for sale require purchase of stock only for a variety of reasons. For example, the seller may believe that there are tax advantages for selling all the stock. If you have to buy corporate stock, it is imperative to conduct a thorough investigation of the corporation’s books and otherfinancial dealings. You can insert warranties and indemnification clauses in the stock purchase agreement. You may also be able to purchase insurance.
The Law office of Frederic R. Abramson represents businesses in New York. If you have any questions regarding purchasing a business, feel free to call at 212-233-0666.