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Business Sales & Purchases/Mergers & Acquisitions

YAHNIAN LAW CORPORATION has represented a substantial number of persons and entities in the sale and purchase of business assets, corporate stock, LLC, and Partnership interests. This includes but is not limited to, professional practices such as Physicians, Dentists, Lawyers, CPAs, and others.

As an Attorney and a CPA, with a CFP, an LLM in Taxation (NYU) and a Certificate in Taxation (UCLA), Steve Yahnian is particularly suited for and experienced in the representation of Sellers and Buyers of businesses and professional practices. In particular, Mr. Yahnian specializes in the sales and purchases of closely held businesses and professional practices.

As you can imagine there are wide array of legal, tax and accounting issues when business sellers and buyers negotiate.  Sometimes the sale and purchase of a corporate business or corporate stock, where two or more corporations are involved, which either combine into one corporation, or where one acquires the stock or assets of the other, is classified as a ‘merger and acquisition’.

Mergers and Acquisitions; Sales and Purchases of Assets and Stock

Representing buyers, sellers, lenders and management, Yahnian Law Corporation provides advice, counseling, design and drafting with respect to the following:

  • Leveraged and management buyouts;
  • Straight Cash for Assets or Stock;
  • Installment purchases of assets or stock;
  • Security Agreements securing debt obligations;
  • Tax planning and analysis (tax-free reorganizations);
  • Director fiduciary considerations;
  • Post-closing management equity arrangements;
  • Noncompetition and other post-closing restrictive agreements;
  • Dissenting shareholder matters;
  • Employee benefit matters;
  • Environmental issues;
  • Workouts and restructurings;
  • Fraudulent conveyance matters;
  • Successor liability.
  1. IntroductionWhen businesses or individuals consider buying or selling a business, they will usually think of it is as a single, simple transaction – they “sell” the business and get cash in return. It’s not that simple. As with most things in the world of business and our legal system, the process of buying or selling a business can be very complicated. This comes a surprise to some people but there are many methods and configurations in which to accomplish the “sale of a business”  or a professional practice and a lot  of practical and legal things to consider. In my law practice, I advise on all of these matters. Below is a summary of some of the matters we would discuss before you buy or sell a business.

2. The primary methods of selling a business

Outlined below are the most common methods used for selling a business.

  • Stock sales: In a stock sale, the buyer purchases the outstanding stock issued by the selling corporation – or in the case of an LLC, the outstanding membership interests. The buyer typically assumes all liabilities of the Seller, unless otherwise agreed by the parties. Sellers will usually prefer stock sales due to the advantageous tax consequences as well as the assumption of liabilities by the buyer, which creates a clean break for the seller’s shareholders. Buyers prefer asset sales due to the tax advantages and avoiding the selling company’s liabilities.
  • Asset sales: In an asset sale, the buyer purchases seller’s assets, and assumes only those liabilities that it agrees to assume. Any liabilities not assumed remain the obligation of the Seller. Typically the selling company that is a corporation will  distribute the sale proceeds to its shareholders via a dividend/liquidating distribution. With the exception of a pass through entity, the selling company will pay taxes on the asset sale, and the shareholders will pay taxes on the dividend. Buyers usually prefer an asset sale to a stock sale.
    Mergers: Mergers usually take place between or among corporations. In a merger, the target company (i.e. the seller) typically merges with and into the buyer company, which survives the merger. This is usually accomplished by the buyer converting the stock owned by seller’s shareholders into the stock of the buyer.
    Tax-free reorganizations: Mergers are a type of tax free reorganization usually conducted by corporation. However, LLCs and Partnerships can also engage in tax free mergers of two or more companies. Although there are several  forms of a tax-free reorganization, the basic concept of a tax-free reorganization is that buyer pays the purchase price by using buyer’s own stock as the consideration, which results in a tax free transaction, except to the extent of any “boot” (non stock consideration)  received by the seller’s shareholders.

3. Legal Considerations

Some legal considerations when buying or selling a business are the following.

Buying or selling a business can create some unique legal challenges to everyone involved. An M&A transaction that is not properly structured from a legal standpoint can create serious business, legal, accounting and tax problems for everyone down the road. Here are some important legal considerations:

Make sure you hire an M&A attorney: This may sound obvious coming from an attorney who practices in this area, but without one, the likelihood that you will miss an important legal consideration in your deal increases significantly. An attorney with M&A experience helps you properly document the transaction, makes sure that ongoing liabilities and obligations are properly defined, and helps you move towards a smooth closing.
Use a purchase agreement: Do not simply sign / accept a bill of sale and be done with the deal. Make sure you have a properly prepared definitive agreement between buyer and seller that clearly sets forth what is being transferred and what liabilities and obligations each party is assuming/undertaking. Among other things, a good agreement will also set forth appropriate representations, warranties and indemnity promises.
Conduct thorough due diligence: This is particularly important for the buyer. A buyer needs to know all the details of the business they  are buying – including whether of not the assets of the business are coming to them  free and clear of liens.

4. Other Practical Considerations

Some practical considerations when buying or selling a business include the following:

In addition to the legal advice and services I provide, I try to help clients consider the other aspects of buying or selling a business. Below is a short list of the things I share with business owners to help them comprehend the process of selling a business from a practical point of view.

  • Make sure you think through the reasons you are selling a business. This may sound obvious, but there are a multitude of factors, consequences and issues  to selling a business.
    • Are you tired of the business?
    • Do you want to retire?
    • Do you want to remain involved with the business, but just need/want the capital from the sale?All of these sorts of things should be considered when working with your M&A attorney and other advisers in determining the terms of the sale of the business.
  • Is this a “family business” in which your children or other family members have an interest or expectation of long term involvement? Sometimes people sell off a closely held business without considering the options of keeping the business in the family for future generations. While this might not be a possibility or option for some, it is something I often recommend people give some thought to. There are ways to step away from the business, generate passive income, and still hand it over to family.
  • Is finding the right buyer important to you? A business owner who has spent years building a business might often be reluctant to sell the business for fear of a potential buyer not maintaining the business in the vision of its founder. Some business owners don’t care about this, but if you do, finding the right buyer for your business becomes very important.
  • Determine what you want to get out of the sale of your business before you begin negotiating terms. Don’t let a buyer dictate the terms when you sell a business. Before you begin the process, put  lot of thought into what you want or need to get out of the sale. Use that as the primary driver as you negotiate terms. For people selling a business out of desperation, this might not help things all that much – but still, it is important to remember why you are selling your business as you work through the details.

5. Basic Matters

The purchase or sale of a closely held business is a complex transaction. It is one which requires a great deal of skill and knowledge in matters of law, tax, accounting, and negotiation. Generally these skills are not all found in one individual. Often the owner will be knowledgeable about the operations of the business, but lack the experience and skills needed to buy or sell an enterprise. For many owners, buying or selling a business is a once in a lifetime ordeal.

Buying or selling a business is a very significant transaction to the parties. For the seller, it can determine the size of his estate, have a material impact on retirement wealth, and provide funds for investing in new ventures. For the buyer, the purchase can mean the difference between success and failure and between wealth and financial ruin.

With so much at stake in a business purchase, it is important for the buyer and the seller to approach the transaction in an informed manner and to assemble a team of experts to provide the knowledge and tools needed to achieve a successful transaction. With that in mind, the following discussion is to give the buyer and seller and members of the selling and buying  side a transactional, “hands on,” framework for identifying and analyzing the considerations and concerns which should be examined in both buying and selling a closely held business. Primary focus of the following is on transactions involving the sale or purchase of closely held businesses, which is a particular area of expertise and focus of YAHNIAN LAW CORPORATION.

a. Terminology

The terms “merger” and “acquisition” are commonly used interchangeably in the business community. To an attorney, however, a “merger” is the statutory process of combining the acquired corporation into the acquiring corporation, often referred to as a “statutory merger”  Unless the context otherwise clearly indicates, the word “merger” is used in that sense throughout this discussion.

Despite any differences in terminology, the substantive result of either a merger or acquisition is the same: one corporation obtains ownership of another corporation.

b. Five Basic Acquisition Methods

One corporation can obtain ownership of another corporation by any of the following methods:

•The purchase of all the outstanding shares of one corporation by another corporation for cash or promissory notes
•The purchase of all assets of one corporation by another corporation for cash or promissory notes
•The statutory merger of corporations
•The exchange of all shares of one corporation for shares of the other, acquiring, corporation
•The exchange of all assets of one corporation for shares of another corporation

6. Legal Considerations in the Purchase and Sale of a Business

Parties to the purchase and sale of a business must contemplate a variety of legal issues including, but not limited to, the following:

  • Income Tax consequences of the transfer
  • Sales and use taxes,
  • Property taxes
  • Assignment of trademarks and service marks
  • Compliance with hazardous waste regulations
  • Use of letter of intent for the purchase of the business
  • Pre-sale investigation and due diligence of the business
  • Use of noncompetition clauses in the sale of a business
  • Compliance with bulk sales division of Commercial Code
  • Fraudulent transfers and creditors’ rights
  • Special requirements for purchase and sale of professional practices
  • Issues relating to the purchase and sale of a franchise

If the transaction includes a transfer of employees, then labor and employment issues might arise. However, there should be no issue concerning the statutory duty to warn the employees and various government officials about a mass layoff [see generally Lab. Code § 1400 et seq. (Worker Adjustment and Retraining Notification Act, or WARN Act); see also 29 U.S.C. § 2101 et seq. (equivalent federal law applicable to larger employers)], even if the threshold number of 50 employees were transferred, because there would be no mass layoff under the statute. The WARN Act defines a mass layoff in terms of employees losing their positions with the employer [Lab. Code § 1400(c), (d)], whereas in the case of a business transfer that includes existing employees, the employees would merely be exchanging the former employer for a new employer. There would be no duty under the WARN Act even if not all of the existing employees were transferred, as long as fewer than 50 were laid off in the process [MacIsaac v. Waste Management Collection & Recycling, Inc. (2005) 134 Cal. App. 4th 1076, 1086–1087, 36 Cal. Rptr. 3d 650].


7. Forms of Mergers and Acquisitions

Mergers and acquisitions (M&A) are two distinct forms of business transactions that both result in the consolidation of two companies into one. Completing a merger or acquiring another business is a major event for any company. Those type of  transactions often have dramatic implications for all parties — owners, management, employees, and  customers.

Understandably, the early stages of exploring a potential merger or acquisition may require legal preparation. For example, seller, buyer or both may consider entering into a confidentiality and non-circumvent agreement at the early stages of exploring a transaction.

If you are a seller in the transaction, a business broker engagement agreement will set out terms for your exclusive representation. It is usually a good idea to have your attorney review and suggest modification of the Broker agreement before retaining the business broker to market your business.

8. Mergers

A merger occurs when two or more separate companies combine to form a single company. There are five common types of mergers:

  • conglomerate,
  • horizontal,
  • vertical,
  • product extension, and
  • market extension.

A merger of equals is a merger of two or more companies where there is no designated acquiring company.  Rather, the combined companies will have equal or close to equal board representation on the new board. Stockholders of each company surrender their shares and receive shares from the new company.

A true merger of equals is relatively rare. Usually one company is actually acquiring another, but out of deference to management and employees or as a marketing tactic, the companies will refer to it as a merger instead of an acquisition.

9. Acquisitions

An acquisition is the purchase of one company (the target) by another company (the acquirer). Acquisitions can occur through the purchase of the stock or other equity interests of the target company or through the purchase of all or a substantial amount of the target company’s assets.

  • Stock purchases. The acquirer buys the shares of the target company from its shareholders. As a result, the acquirer takes on all of the target company’s assets and liabilities. The complexity of a stock acquisition from a legal perspective depends on many factors, one of which is the number of shareholders in the target company.
  • Asset purchases. The acquirer buys some or all of the assets of the target company. Examples of assets can include equipment, vehicles, stock, inventory, patents, trademarks, copyrights, other intellectual property or facilities. The acquirer need not purchase all of the target company’s assets, but rather has the option to choose which assets–and liabilities–to take.  This is usually considered one of the advantages of asset purchases over stock purchases.


10. Mergers and Acquisitions Resources and Considerations

Both mergers and acquisitions are complex transactions that require significant strategic business planning and legal due diligence. An experienced mergers and acquisitions lawyer can help guide you through the various legal areas that govern M&A law.

Some important legal considerations include:

  • Due Diligence. During a merger or acquisition, both the selling and the acquiring company must conduct due diligence. For sellers, this means taking the necessary steps to maximize the value of the company and closing the deal. In order to accomplish these goals, the seller must produce complete and accurate documentation. The acquiring company must then review and analyze the documentation to assess whether it supports closing the deal and to identify any red flags or risks. The information the seller needs to provide often includes all the company’s corporate governance documentation, financial liabilities, capitalization schedules, tax information, operating information, customers and vendors, personnel and labor relations, payroll and benefits, real property, intellectual property, research and development, contractual rights and obligations, and any other special industry considerations. A due diligence lawyer can help you with this step.
  • Corporate Governance. One of the critical areas of due diligence is corporate governance. This requires the seller to open its incorporating documents, bylaws, minutes from board meetings, shareholder materials, locations where it does business, any previous deals, changes in control and corporate reorganization, stock transfer ledger, organizational charts, policy manuals and corporate codes of conduct, press releases, and bank accounts. Again, timely and complete disclosure by the seller will help close the deal and alleviate any fear on behalf of the acquirer of unexpected problems.
  • Antitrust. Proposed transactions that affect commerce in the United States and are over a certain size are reviewed by governmental agencies to prevent anticompetitive effects, such as the creation of a monopoly. Accordingly, most large M&A contracts include provisions dictating how the parties will work together during a potential antitrust review.  Sellers want certainty that the deal will close regardless of the time it takes for antitrust clearance. However, acquirers want the option to walk away from the deal if it is no longer consistent with its economic interests. A mergers and acquisitions lawyer can help negotiate a mutually acceptable antitrust-related provision to prevent the deal from falling apart even prior to antitrust review.
  • Taxation. Major corporate transactions like mergers and acquisitions often carry with them significant tax implications for all entities involved. Accordingly, as a tax lawyer and a CPA, Steve Yahnian is closely involved in structuring the transaction so the entities can take advantage of tax-preferred structures and avoid unnecessarily expensive tax loads.

Mergers and acquisitions involve purchasing or merging with another company. Handling mergers and acquisitions matters requires not only a thorough understanding of the law but expertise in business matters as well. Mr. Yahnian has years of experience in business law, real estate law, tax law, intellectual property law, and other areas of law that arise in business sales and purchases.

11. Mergers & Acquisitions Legal Services

YAHNIAN LAW CORPORATIN provides a number of legal services related to mergers and acquisitions, including:

  • Private Company Acquisitions and Sales of stock, assets or both
  • Acquisitions and Sales of Subsidiaries, Divisions, and Other Assets
  • Acquisition Financings
  • Joint Ventures
  • Leasing
  • Licensing
  • Franchising
  • Asset-Sharing Arrangements
  • Formation and Operation of Strategic Alliances
  • Asset Sale Transactions
  • Management/Negotiation of Corporate Mergers and Acquisitions
  • Tax Free Corporate Acquisitions
  • Tax Free Corporate Reorganizations
  • Tax Free Corporate Separations;
  • Tax Free LLC acquisitions and mergers;
  • Tax Free Partnership acquisitions and mergers


12. Benefits of Our Mergers & Acquisition Legal Services

For any business considering a merger or acquisition, legal representation is critical to making sure that the transaction complies with all applicable laws and is structured in the most advantageous manner. YAHNIAN LAW CORPORATION  has extensive experience handling all types of mergers and acquisitions, and can guide and advise clients through the process.

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