Law News and Tips
The Great Transition
THE GREAT TRANSITION
Fred L. Vilbig © 2018
As I’ve said before, everyone is predicting that over the next decade or so, we are going to see the largest business transition in history. The aging baby boomers are either voluntarily or involuntarily going to pass their businesses on to the younger generation. It is important to plan. As I mentioned in my last column, my grandfather (God bless him) didn’t.
Although early in this process we thought that mom and dad would be giving their businesses to their kids, it looks like that is not the case. Many of the business owners put little away for retirement. Their businesses are their retirement savings. They can’t put that in jeopardy.
But why not sell the business to the kids? Many times the kids aren’t interested. Other times, the kids wouldn’t be a good fit for one reason or another. Quite often, the kids can’t get a loan, even an SBA loan, or they don’t want to personally guarantee a loan, putting everything they own at risk. What we are seeing more and more is sales to insiders or sales to outside third-parties. We recently closed on the sale of an asphalt company for these very reasons.
When we represent a buyer, we always suggest that the transaction be structured as a purchase of the company assets. The reason for that is that the buyer doesn’t want the seller’s liabilities. For instance, in preparation for the sale, the seller may have recently fired some employees without getting adequate releases. Or maybe there are pending income or employment tax issues. Maybe they’re unsatisfied liens. A buyer doesn’t want any of that baggage, so they buy the assets but leave the liabilities.
The problem is that liabilities can be pesky-particularly in product liability and environmental cases. The courts have decided that if you are buying an entire business and plan to continue it (even using the old name), then the buyer should be liable for some, if not all, of those liabilities. It’s very annoying.
That’s where “due diligence” comes in. In a well written purchase agreement, the seller will give the buyer lots of warranties and representations regarding all kinds of things. It would be nice if we could trust people, but we can’t. As President Reagan once said, “Trust, but verify.” That is due diligence.
For the buyer, due diligence takes many forms depending on the particular assets. If there is real estate, you’ll want title insurance. If you are buying things (like equipment or vehicles), you need to make sure there are no liens for loans. You’ll want to make sure there are no tax liens or outstanding judgments. And you’ll want the seller’s lawyer to certify the existence and authority of the seller. Buyers may not want to take the time or pay the money to do these investigations, but you ignore them at your peril. It’s sad when a buyer thinks he or she has purchased a golden nugget only to find out that they have iron pyrite (that is, fool’s gold).
So if you are in the market to buy your own business, caveat emptor, that is “Buyer beware.” The old saying applies: an ounce of prevention is worth a pound of cure. Sometimes that cure can be terribly expensive.
Call if you have any questions.
- Trackback Link
- Post has no trackbacks.