Many people start businesses by purchasing an existing business. Most business acquisitions are effectuate through an asset purchase. Here, we discuss the process for any asset purchase agreement.
Step 1: Draft/finalize/negotiate the Purchase Agreement . You want to ensure that the Purchase Agreement contains the appropriate provisions that pertain to your specific transaction. For instance, you may want time to conduct due diligence, obtain required licenses, or need the approval of a landlord before being completely bound to purchase the seller’s assets. You may be concerned about issues such as non-compete agreements and non-solicit agreements. You want to ensure that any material representations made by the Seller are included in the Purchase Agreement. These are all common provisions which should be included in the contract along with anything else necessary to meet your expectations and protect you from any unknown liabilities.
Step 2: Conduct due diligence. Due diligence is an involved conversation but in most instances you want (1) to review the lease (2) review tax returns and Quickbooks records (3) confirm ownership (4) review license agreements, vendor contracts, etc. (5) confirm ownership of any intellectual property that is being transferred (6) determine required approvals if any, and (7) confirm the ownership structure of the Seller.
Step 3: Prepare miscellaneous contracts that might be necessary to further the purpose of the deal such as non-compete agreements, transition agreements, employment contracts, or corporate/LLC resolutions.
Step 4: Before a Closing (discussed below) in most cases you will need to notify the Dept. of Taxation to ensure there are no tax liabilities that you as the Purchaser may be responsible for paying. Allow for approximately 10 – 14 days before a response from the Dept. of Taxation.
Step 5: Prepare for closing. Closing is basically the exchange of money, signing of the Bill of Sale and any other documents necessary to finalize the transaction.
With an asset purchase you’ll almost always need to form a new entity to purchase the subject assets. Regardless of the choice of entity you must have a CPA to assist you with appropriate tax elections and financial planning considerations. These don’t have to be complicated issues but you need to consult a good CPA.
You will also need to obtain required insurances (both personal and commercial) especially if you have employees. To that end I recommend Julia Moore (https://www.jmooreinsurance.com/) to assist you with your insurance needs.
For more information on Asset Purchase deals download our ebook!