Earlier this year, I posted a blog entry about the legal issues faced by Sacramento small business lawyers and their clients when the client wants to sell their business. It seems only natural to write a companion piece explaining the legal issues faced by a client who wants to purchase a business. Although some of the issues are somewhat similar, buyers and sellers in a business sale can have vastly different goals and perspectives in the process. As such, the best business lawyers are able to wear both hats based on their client’s end of the transaction.
When a Sacramento small business attorney wears the business purchaser hat for her client, there are some particular pieces of advice to impart. The first and most important thing to consider is the particular structure of the purchase deal. There are two main types of purchase structures: an entity purchase and an asset purchase.
An entity purchase is the more complex and extensive of the two purchase structures. In order to understand the mechanics of an entity purchase, a client must be able to distinguish the difference between a business itself and the legal entity that operates the business. Both of those must also be distinguished from the existing business owner. The business owner owns and operates the business entity, and the business entity operates the business. By way of example, a business owner named Mario may own a legal entity known as Mario’s Pizza, LLC. His limited liability company may operate two pizza joints that do business as Mario’s Pizza Parlor and Mario’s Pizza Palace.
In an entity purchase agreement in this situation, the purchaser acquires the rights and interests in more than may be readily apparent. Not only does the purchaser acquire the rights to the Pizza Parlor and the Pizza Palace (and everything related to business operations therein), but also the rights to Mario’s Pizza, LLC as a legal entity. The purchaser is now required to pay taxes and obtain licenses in the entity’s name, as well as submit the proper state filings.
By contrast, the purchaser has the option to enter into an asset purchase agreement. This type of purchase offers less extensive rights to the purchaser, but may be cheaper and easier on a number of levels. In purchasing only the assets of a business entity, the purchaser essentially purchases only the right to conduct business operations for a profit. The ownership interests remain with the legal entity, whether it be with the shareholders of a corporation or the managing members of a limited liability company. Assets purchases are popular with purchasers who do not want to absorb the liabilities of the owner company.
Only a Sacramento business lawyer can evaluate your purchase proposal and determine which type of purchase structure will accomplish your business goals in your particular market. Your attorney knows the proper legal language, negotiation tactics, and tricks of the trade to turn your proposal into a functional business purchase agreement so that you can spend less time worrying and more time profiting.
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