We often have inquiries from clients considering the purchase of a business. An experienced attorney should be consulted when commencing this process. Initially, the seller’s attorney will deliver the contract to the buyer’s attorney for negotiation. Should the business being sold be a franchise, the final contract should be conditioned on approval of the franchisor to the buyer conducting business under the franchise name.
After consulting an accountant to confirm that the business to be purchased is financially viable for the buyer’s future income needs, the financial terms of the deal are to be structured. There may be a broker who has negotiated the initial terms, which may be modified during the contract negotiation process. Usually the payments required of the buyer are the delivery of the downpayment to the seller’s attorney to be held in escrow until closing and another payment at closing. The payment at closing may be the last payment to be made or the buyer may sign a promissory note for subsequent payments to be made after the purchase.
Particular protections need to be in place on behalf of the buyer. A lien search should be obtained prior to closing, so that the seller obtains lien releases for equipment and tax matters that may have an effect on the buyer. For example, if a freezer is to be conveyed and the seller has a business loan on such equipment, a UCC Financing Statement is likely to be filed evidencing the loan. If the loan is not paid at the closing and the UCC remains, the buyer is acquiring the freezer subject to the seller’s loan and will not own it outright.
Further, most business sales are subject to New York’s Bulk Sale requirements. By way of background, New York State requires the payment of sales taxes. When a business is sold, the Bulk Sale filing must be made with New York State, which will issue a determination confirming whether or not the seller has paid all required sales taxes. The parties will allocate the purchase price to particular items such as motor vehicles, personal property, real estate and goodwill. At the closing, the buyer will pay the sales tax due on the personal property delivered at the closing. If the parties do not complete this procedure and the buyer pays the seller for the business or takes control of the business, the buyer could be legally liable for the seller’s unpaid sales taxes.
Other client needs are dictated by the type of business purchased. For instance, if a purchaser is also buying the inventory of a food-related business, safeguards should be in place so that expired food is not part of the purchase. Likewise, if store inventory of hard goods is being purchased, the buyer may want to eliminate obsolete items that he cannot ultimately sell from the inventory to be purchased.
Business purchases may vary depending upon whether the seller will assist the buyer in training procedures before or after the closing, in order to insure the buyer’s success at the location. Business entity selection dovetails with this issue. For example, the business to be sold has an awning with the name of a well-known neighborhood business. The value of the business (“goodwill”) is partially determined by such neighborhood reputation and appearing as if the business has not been sold. In order to avoid “inheriting” the debts of the entity selling, the buyer’s attorney will likely suggest that the buyer form a new entity. However, in order to harvest the benefit of the reputation that the business enjoys, the buyer may wish to file a “doing business as” (dba) name that is the same as that on the awning. This strategy is effective if the use of the business will remain the same, such as an Italian restaurant.
Most likely, the business will continue operating at the same location, which is usually encumbered by a commercial lease. Attorneys for the buyer should review the lease situation depending upon landlord preferences. It should be recognized that virtually any lease requires the landlord’s consent to the assignment of the lease and to the occupancy by anyone besides the named tenant. Contact should be made with the landlord by the buyer’s attorney and the procedures in the lease need to be followed in order to obtain landlord approval to the assignment. Assuming that the existing lease is being assigned, it needs to be reviewed to confirm that the provisions apply or are desirable to the buyer. For instance, if the lease contains a specific use clause such as sale of women’s clothing and the buyer intends to run a furniture store in the location, the lease needs to be modified to allow for same. Likewise, if the lease expires in two years, the buyer will need a lease modification extending the lease for another ten years so that its business does not need to renegotiate a lease or relocate in a short timeframe. Potentially, the landlord may prefer that the tenant sign a new lease and will deliver it to the buyer’s attorney for negotiation on behalf of the buyer. Should the business be contained in a property owned by the seller, arrangements can also be made for the purchase of the property.
Our firm is prepared to assist those purchasing businesses and manage the variations presented by each transaction.