The Purchasers attorney will usually prepare the Agreement of Sale, Covenant Not To Compete and other similar documents since they include various warranties, representations, and guarantees of the seller. They can also have an adverse effect on the future of the business. By the same token, the sellers attorney will normally prepare the Note Agreement, Stock Pledges, and Security Agreements because they are usually designed to protect the seller in the event that a default should occur some time in the future.

The legal procedures involved in buying an existing business can become quite complex. Even if you are a do-it-yourselves, you should seek the services of a competent business attorney to represent you. In order to ensure that you are protected as fully as possible, have your attorney take care of the following items in connection with the purchase:

1) Review the structure of the deal, including the actual sale agreement documents. If your attorney is not a tax specialist, it would also be wise to have an accountant review the terms of the agreement and advise you on possible ways to structure it better for tax purposes including the purchase price allocation.

2) Comply with the local Bulk Sale or BulkTransfer Act. In most states, the buyer of a retail or wholesale establishment or certain other types of businesses must prepare a "Notice to Creditors of Bulk Transfer" and, usually, file it in counties where the business operates. This notice is also published in a general circulation newspaper prior to the purchase of the business. If this is not done, the seller's unsecured creditors may attach the property that you thought you were buying free and clear.

3) Check for recorded security interest or liens. Before closing the purchase, your attorney should check with the appropriate state office (usually the Secretary of State) to determine whether anyone has recorded a "security interest" (a lien or chattel mortgage) against the personal property of the seller's business, For a fee, the Secretary of State's office will generally provide a listing of any security interests that have been recorded as a lien against the assets of the business you are buying, Also, if the transaction involves the purchase of real estate, you should have a title search performed to determine if the seller has good and marketable title. This search will disclose any recorded mortgages or other claims against the property that the seller has not disclosed to you.

4) Check on the applicability of any state tax clearance certificates that will include state employment, sales and use taxes. In cases where there is a liquor or beer license being transferred, this certificate must be received by the appropriate transfer agencies before a liquor or beer license will be transferred to the new owner.

5) Review the terms of any important contracts, such as leases and franchise agreements that will be assigned to you. Make sure that the assignment is possible under the terms of such contracts without any detriment to you. Similarly, if you are acquiring a business in a certain regulated industry, particularly relating to food, health, or liquor sales, make sure that proper legal steps are taken to transfer any federal, state or local licenses. Finally, in most states, you have only 90 days or so after acquiring an ongoing business to apply for the right to acquire the seller's unemployment tax experience rating. This may save you quite a bit in state unemployment taxes, because you will be able to "inherit" the seller's lower tax rate, as a "successor employer," rather than paying the regular unemployment tax rate applicable to a new employer. Be sure that you don't miss the deadline for making any required election.

Back to special reports on buying a business.  

Closing the Deal:
Tax Clearances and other Legal Requirements