Buying, Merging and Selling Businesses Attorneys – Astoria, Brooklyn & Manhattan, NY
The decision to buy, sell, or merge a business may be financially motivated, but it’s easy to lose track of all the necessary steps between start and finish when your focus is solely on the end result. It’s imperative that you take every precaution possible to fully address each legal detail of the deal, big or small. You’ll want the legal expertise of the attorneys at Ortiz & Ortiz to assist you in navigating the process to ensure you avoid expensive pitfalls and don’t leave yourself open to trouble in the future.
Buying, Selling, Or Merging
These three actions are separate from one another but share some similarities. Those who are selling a business must first evaluate what the business is actually worth before seeking out potential buyers. This is done by documenting your past success and using it to create a projection of future activity. Once that’s settled, you and the buyer enter into negotiations, which is usually the lengthiest part of the process. Negotiations result in the drafting of a sales agreement that will determine all aspects of the transaction. Following completion of the sale or purchase, both buyer and seller will notify the IRS and handle the tax consequences of the deal.
Merging is a different procedure wherein two companies combine assets and become one entity. One company is termed as the “surviving” company while the other becomes “non-surviving.” The liabilities, assets, space, employees, and shares of the non-surviving company become those of the surviving company. Simply put, two companies become one as a result of the merger. The biggest difference is what happens to stock held by the shareholders. When a company is sold, its shareholders get some of the profits but lose control of the stock. After a merger, they keep the stock and it is converted to that of the surviving company.
The Parts of Buying, Selling, and Merging – No matter which action you plan to undertake, the steps are the same.
Preparing the Letter of Intent
Once you begin negotiations to buy, sell, or merge a business, you’ll want a Letter of Intent (sometimes known as an LOI, Term Sheet, or Purchase Order) that lays down the groundwork of the terms of the offer being made. The purpose of the LOI is to make clear in text what the parties are agreeing to, including their rights and responsibilities. Generally, the person initiating the sale or merger will send the letter to the other party, but they will ultimately work together to establish these terms. Beyond a few terms (such as a confidentiality agreement), an LOI is not legally binding. To ensure all parties are equally protected and have their necessary rights established as they go forward with the deal, you’ll want to consult legal counsel to go over your LOI and make revisions as needed.
Another document is needed alongside the Letter of Intent during the early steps of a deal. As part of their research, the initiating party will need to learn a great deal of sensitive information about the business they are buying or merging with. The information they learn includes things like operational costs and customer information, which can then be used to determine the potential strengths and weaknesses of the business. If either party decides against the deal, the revelation of the information to the public could prove damaging to the other party. An NDA is required to prevent the buyer or future partner from discussing this proprietary information should either party choose to back out of the deal.
An NDA is legally binding and establishes what information discussed between the parties needs to be held in strict confidentiality and for how long. It also lays out what legal remedy is available should the terms of the NDA be broken. Both parties will want to carefully negotiate these terms and go over the agreement with counsel so as to fully understand them.
The LOI and NDA serve as the preparatory steps to the final sale or merger of a business. But before reaching that step, it’s the responsibility of everyone involved to understand what they’re getting into. Due diligence means investigating the important aspects of the business to be bought or merged with so that it’s known what sort of shape the business itself is in and what problems it may be facing. This includes obvious details like yearly profits and operating costs, but you should always dig deeper. Factors like debts, assets, and liabilities can leave a potential buyer in a poor position once the sale is finalized. Consulting an attorney working in business law is the best way for the buyer to know what questions they should ask and to properly analyze the answers they get.
Sale or Merger Agreement
The last step of any purchase or merger is the final agreement. Like the NDA, this agreement is a legally-binding contract that sets in stone the terms that the parties agree upon to complete the transaction. It establishes, among other things, what is being purchased, how ownership is being transferred, warranties for the buyer and seller, and the responsibilities of both parties after the deal is closed. Sales agreements contain many complexities integral to protecting both parties. It may be tempting to draft up a simple agreement you believe covers the necessities, but in doing you could easily find yourself saddled with more—or less—than you wanted. Don’t leave a business law attorney out of these negotiations, and don’t settle on a final draft until you’ve had the chance to go over every detail.
Ortiz & Ortiz Can Help You Reach Your Goals
For over fifty years the team at Ortiz & Ortiz has helped small businesses solve their legal issues. With expertise in business and commercial law, the lawyers of Ortiz & Ortiz can represent and protect you during simple or complex legal processes. Contact our firm today to schedule a consultation.