Buying or Selling a Business in Massachusetts
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If you are considering buying or selling a small business in Massachusetts, our business lawyers can help. Even before you call a lawyer, there are some basic things you should know about the process.
Sale of Assets vs. Sale of a Corporate EntityWhether you are a buyer or a seller, one of the first considerations is whether the transaction is an asset sale or a sale of the stock or membership interests in an established corporation (LLC, S Corp or Corporation).
The main difference is the extent to which the buyer is assuming liabilities. In an asset sale, you are buying only the assets (including intangible assets such as goodwill), but not assuming any obligations the seller has incurred, unless you specifically agree to do so. In contrast, if you outright purchase a corporate entity, you are essentially stepping into the shoes of the seller- that means all assets but also all liabilities. There are advantages to buying the entire entity. You will know that you have assumed all of the things necessary to conduct the business, from the name, the the corporate status, contracts signed by the seller entity, etc., without needing to specifically list everything you might want to acquire. The disadvantage, of course, is the assumption of liabilities. Particularly if the company has been in business for a long time, and/or has employees, you will want to do your due diligence about any potential liabilities if you are contemplating a straight purchase of the entity, or consider structuring the deal as an asset sale instead. |
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Who Should Help You With the Purchase or Sale of a Business
Especially if this is your first time buying or selling a business, it can be hard to know where to start to get the advice you need. Here is a short list of professionals you should consider seeking out, and how they can help you:
A business attorney can help you prepare and review the deal documents, and make sure all of the important points are covered to protect your interests and make sure the transaction goes smoothly.
An accountant or CPA should be consulted to make sure that you are structuring the deal in the most tax-advantageous way.
A business insurance agent to review the existing coverages and what you will need going forward, so that you have everything you need in place at the closing.
If you are unsure how to approach the purchase/sale price, you may also consider consulting a business valuation professional with experience in the relevant industry.
A business attorney can help you prepare and review the deal documents, and make sure all of the important points are covered to protect your interests and make sure the transaction goes smoothly.
An accountant or CPA should be consulted to make sure that you are structuring the deal in the most tax-advantageous way.
A business insurance agent to review the existing coverages and what you will need going forward, so that you have everything you need in place at the closing.
If you are unsure how to approach the purchase/sale price, you may also consider consulting a business valuation professional with experience in the relevant industry.
Common Sale Terms
Once you have determined an appropriate purchase price for the business and/or the assets of the business, there are a few other terms you should be aware of and consider.
Allocation of the purchase price: usually the parties agree how much of the price is allocated to tangible assets and how much to goodwill, and this will be reflected in the purchase agreement. This allocation can have tax consequences for both parties, so you should both seek the advice of an accountant about how to structure this part of the agreement.
Closing date: you will execute the purchase agreement before actually closing the transaction. Generally the buyer will be required to make a deposit at the time of the purchase agreement, which could be retained by the seller if the deal does not close. As a buyer, you want to be sure the planned closing date gives you sufficient time to finalize your financing, if any, and other actions you need to take in preparation for closing so that you do not risk your deposit.
Transfer of licenses, contracts, and leases: before signing the purchase agreement, both parties should be clear about what legal documents need to be transferred or assigned to allow the buyer to continue operating the business seamlessly. Sometimes this involves negotiations with third parties, for example in the case of a lease for the premises where the landlord may not be obligated to accept the buyer as a new tenant. If these negotiations cannot be completed before signing the purchase agreement, the buyer should be sure to include a contingency provision regarding essential documents like a lease, so that if consent cannot be obtained from the third party you are not obligated to complete the transaction. Similarly, if the business requires specific licenses (i.e., a liquor license), you will want to make sure that process, and appropriate contingencies, are addressed in the purchase agreement.
Names, numbers and intellectual property: especially if you are structuring the deal as an asset purchase agreement, you will want to be sure that all rights needed to operate the business are specified as transferred assets. This includes the business telephone number, name, and any urls used in the business. It should also include any trademark or copyright rights in the information used in the business. Even if there are no registered trademarks or copyrights, the seller of the business still holds intellectual property rights in its name, marks, logos, and images and content used in marketing the business. As a buyer, you want to make sure all of these are transferred to you in the purchase agreement.
Non Compete agreement: in most cases, a substantial part of what they buyer is buying is the goodwill of the business. For this reason, it is common for a purchase agreement to include a non compete agreement restricting the seller from conducting a competing business in the relevant geographical area for a period of time after the closing. This protects the buyer from losing the goodwill they purchased to the seller. If a non compete is signed as part of the sale of a business, it is not subject to the restrictions of the Massachusetts Noncompetition Agreement Act, and can extend for a longer period of time than agreements signed in connection with employment.
Allocation of the purchase price: usually the parties agree how much of the price is allocated to tangible assets and how much to goodwill, and this will be reflected in the purchase agreement. This allocation can have tax consequences for both parties, so you should both seek the advice of an accountant about how to structure this part of the agreement.
Closing date: you will execute the purchase agreement before actually closing the transaction. Generally the buyer will be required to make a deposit at the time of the purchase agreement, which could be retained by the seller if the deal does not close. As a buyer, you want to be sure the planned closing date gives you sufficient time to finalize your financing, if any, and other actions you need to take in preparation for closing so that you do not risk your deposit.
Transfer of licenses, contracts, and leases: before signing the purchase agreement, both parties should be clear about what legal documents need to be transferred or assigned to allow the buyer to continue operating the business seamlessly. Sometimes this involves negotiations with third parties, for example in the case of a lease for the premises where the landlord may not be obligated to accept the buyer as a new tenant. If these negotiations cannot be completed before signing the purchase agreement, the buyer should be sure to include a contingency provision regarding essential documents like a lease, so that if consent cannot be obtained from the third party you are not obligated to complete the transaction. Similarly, if the business requires specific licenses (i.e., a liquor license), you will want to make sure that process, and appropriate contingencies, are addressed in the purchase agreement.
Names, numbers and intellectual property: especially if you are structuring the deal as an asset purchase agreement, you will want to be sure that all rights needed to operate the business are specified as transferred assets. This includes the business telephone number, name, and any urls used in the business. It should also include any trademark or copyright rights in the information used in the business. Even if there are no registered trademarks or copyrights, the seller of the business still holds intellectual property rights in its name, marks, logos, and images and content used in marketing the business. As a buyer, you want to make sure all of these are transferred to you in the purchase agreement.
Non Compete agreement: in most cases, a substantial part of what they buyer is buying is the goodwill of the business. For this reason, it is common for a purchase agreement to include a non compete agreement restricting the seller from conducting a competing business in the relevant geographical area for a period of time after the closing. This protects the buyer from losing the goodwill they purchased to the seller. If a non compete is signed as part of the sale of a business, it is not subject to the restrictions of the Massachusetts Noncompetition Agreement Act, and can extend for a longer period of time than agreements signed in connection with employment.
Addressing Employment Matters on the Sale of a Business
If the business being sold has employees, the buyer in particular should pay attention to how the transition of employment will be handled.
In a sale of stock or membership interests, you are buying the entire business and essentially stepping into the shoes of the seller. This means for employees their relationship with the company will not change, as they will continue to be employed by the same entity. For the buyer, however, this also means you are stepping into the shoes of the seller for purposes of potential employment law liability as well. If this is how your deal is going to be structured, you should have an attorney review the seller's employment policies and assess what kind of risk you may be facing.
In an asset sale, any pre-closing liability for employment law matters will stay with the seller and the original corporate entity. This doesn't mean you have to lose the employees. Most commonly, the agreement between buyer and seller will specify that their employment with the old company will terminate on the closing date, and the buyer will extend new employment offers to all employees.
In a sale of stock or membership interests, you are buying the entire business and essentially stepping into the shoes of the seller. This means for employees their relationship with the company will not change, as they will continue to be employed by the same entity. For the buyer, however, this also means you are stepping into the shoes of the seller for purposes of potential employment law liability as well. If this is how your deal is going to be structured, you should have an attorney review the seller's employment policies and assess what kind of risk you may be facing.
In an asset sale, any pre-closing liability for employment law matters will stay with the seller and the original corporate entity. This doesn't mean you have to lose the employees. Most commonly, the agreement between buyer and seller will specify that their employment with the old company will terminate on the closing date, and the buyer will extend new employment offers to all employees.
How We Can Help
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If you are considering buying or selling a small business, we can help guide you through the process. You can use the button below to schedule a free consultation, or give us a call at (781) 784-2322.
