Perspectives

WFJ Presents: Selling Your Small Business, Part One

WFJ’s Small Business Team has counseled clients in the execution of small business asset purchases for a diverse set of industries, including restaurants/food service, manufacturing, publishing, insurance, retail, and many others. Our attorneys have implemented a thorough and proven checklist approach to help clients navigate the complexities inherent in such a transaction, and have been involved from the inception of the proposed sale through the closing and beyond – managing risk for clients from the “front end” of the transaction.

Unfortunately, all too often our team has also entered into these business asset transactions on the “back end” – when, despite the parties’ good intentions, a party has defaulted on its obligations or the parties have a dispute over what the terms of the agreement were to begin with. When the parties choose to forego professional legal and accounting services on the front end it can create a tangled mess far more stressful and expensive for the parties on the back end.

Our small business team recently encountered one such situation: a small business asset purchase with extended seller financing. The seller and purchaser decided on what assets were to be sold, a noncompete, and a purchase price/valuation and payment schedule, proceeding with the sale prior to consulting a legal or accounting professional. The parties failed to consider many important issues, including the tax implications of the particular allocation of purchase price and remedies upon default. When some of the issues the parties failed to consider or address on the front end surfaced, it was too late for them to be properly addressed. The purchaser, now in default of the parties’ payment schedule, had devalued the company to the point it was questionable whether it was worth the time and effort to take the assets back. So, both parties ended up with unexpected tax consequences and the purchaser only collected a percentage of the agreed upon purchase price after default. Clearly, this wasn’t a good result for either party.

Many lawyers, while appreciative of the large billing potential for their firms in such scenarios, are frustrated when their clients don’t take the time to plan for these contingencies on the front end. They could have consulted an experienced CPA regarding allocation and amortization of purchase price and consulted an experienced attorney regarding mitigation or elimination of risk upon default.

So, what can small business sellers and purchasers do to take steps to protect themselves? Make sure to read Part Two of this series for an overview of some of the complex but common issues that can arise in business asset purchases.

Attorney Nicholas N. Sperling