Making a good deal when buying or selling a business is not as simple as one may think. There are many factors to consider and important decisions to be made prior to the transaction taking place. Read on for tips on how to get the best deal when buying or selling a business.
Different Interests of Buyers and Sellers
In almost every buy-sell agreement, there is or should be an allocation of goodwill vs. assets. The Buyers and the Sellers each have different goals when it comes to how the goodwill and assets are allocated. It is in the Buyers’ best interest to make the assets a greater part of the purchase, as it provides a greater writeoff opportunity on their taxes. The Seller, conversely, benefits from the allocation of the purchase being more goodwill than assets. This is because the Seller pays capital gains tax on the allocation of goodwill, whereas they have to pay more ordinary income tax on the sale of the assets.
The Risks of Buying an Existing Business
Prior to the sale of a business, buyers have an important decision to make. They must decide if they want to buy the business itself or just purchase the assets of the business. This is a significant decision for liability purposes. If the buyer purchases the business itself, they may be subject to any claims or lawsuits from the prior owners’ operations. If the buyer only buys the assets and the asset purchase includes the trade name under which the business is currently operating, there is also a risk of liability if a lawsuit arises.
How Buyers and Sellers Can Protect Themselves
The best way for Buyers and Sellers to protect themselves is through warranties, indemnifications, and contractual language agreed upon prior to purchasing the business. In the drafting of these documents, the seller should warrant that there are no current claims against the business, and if any claims do arise from the actions of the prior owner, the Seller agrees to be held legally responsible or indemnify the buyer for any related costs. If the Buyer is just purchasing assets, the Buyer must decide if they wish to purchase the Seller’s business/trade name. Buying the business/trade name can be good for continuity of operations and retention of customers. However, if the purchase includes the current trade name, there must also be language to limit the buyer’s liability from the prior business operating under the same name. Sellers must also ensure that the contractual language keeps them protected if a lawsuit arises under new ownership.
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