Business Continued from page 37 ______________________ makes a down payment and signs a promissory note to pay the remaining amount. The seller secures the loan with cosigners on the note, a personal guarantee, first or second mortgages on the buyer’s home or other real property, a security agreement on personal assets, the right to take back the lease, or a pledge of stock or LLC membership interests, etc. Stock/Membership Interest Sale or Asset Sale The buyer and seller choose either an asset sale (including trademarks, copyrights, liabilities, customer lists, etc.) or a stock sale if it’s a corporation or membership interest sale if it’s an LLC. The buyer will more than likely want an asset sale. The advantages of buying the assets include tax advantages with depreciation, the ability to exclude unattractive assets, and removing the company’s debts and liabilities from the deal. The disadvantages to an asset sale for a buyer are losing valuable assets such as a lease or contract that can’t be transferred to the new owner. The seller typically wants to sell the entity to pay capital gains rates rather than income tax rates. If the seller is a corporation, the seller will want to avoid the huge hit that comes from double taxation. People in the Business The buyer may want to keep the seller as a consultant, a part-time or full-time employee, or an advisor. If the seller becomes an employee, then the seller signs an employment contract or an at-will letter. If the seller is a consultant, then the seller signs an independent contractor agreement. If the seller will have no part in the business once it transfers to the buyer, then the buyer should consider a non-compete agreement to protect itself from future competition. The non-compete normally covers a geographic area (these days that might include the internet), the type of activities, Page 38 Alaska Business Resource Guide 2014
and the duration of the non-compete. Agreements The business sale agreement is the document that binds the parties to the sale based on a few conditions such as due diligence and financing. The business sale agreement includes the price, earnest money, financing/payment terms, employment/consulting agreements, noncompete agreements, and many other terms including the parties who are part of the deal, assets or business purchase identification, liabilities, representations, closing terms, and dispute resolution procedures. The buyer and seller should not rely on each other’s verbal promises. Everything should be in writing. Due Diligence The process of investigating the business is called due diligence. The buyer asks for information on bank loans, money owed to suppliers, potential claims, contracts, etc. The seller typically represents the accuracy and completeness of these records along with other representations and warranties. The buyer also looks at public information. The buyer may search the recorder’s offices to see if the assets are encumbered by any liens such as UCC finance statements, mechanic’s liens, deeds of trust, etc. A title report will also show whether the property is owned free and clear or is subject to encumbrances. The buyer should search the court system records for any litigation and search other public records to make sure the company is in good standing. The buyer may get a Dun and Bradstreet report to find out the creditworthiness of the seller. Depending on the type of business, the buyer should search the records of other government agencies. The seller can ask for the buyer’s financial statements, tax records, resumes, credit reports, references, court records, and review some of the same records that the buyer will review. If the seller is financing the transaction, then the seller verifies its lien position. The seller and buyer will need to respond to