Negotiating the Terms of the Deal — Buying a Business Checklist Part 2


Negotiating the Terms of the Deal — Buying
an LLC or Small Business In New York – Part 2 Hi, I’m New York business attorney Craig
Delsack and this is part two of my term sheet check list. If you have not already done so,
I recommend viewing part 1 before continuing with this video. As we discussed in part one, there are numerous
elements to consider when creating your term sheet. Next on the list looking at some of
the challenges. 1. Transfer Issues. Whether the business is
being sold as a stock sale or as an asset sale, you have to be concerned about whether
there are restrictions to transferring the assets of the business. When conducting due
diligence, you and your corporate attorney should determine which assets may need prior
consent for the transfer (like business space leases, major contracts with customers or
vendors, or bank loans or credit agreements). A mere transfer of any stock or a controlling
interest of the ownership of the business stock, may trigger the obligation to obtain
consent. 2. Covenant not to Compete. Generally, how
successful the business you are buying was in the past was a result of the management
and ownership of the business. So you might want to consider keeping certain “key”
employees on and have them enter into employment agreements or consulting agreements. Of course,
if you have the expertise to run the business from day 1, then you may want to “buy”
the benefit of having the prior management and prior business owners from competing with
your newly purchased business. You would want to enter into a “non-compete agreement”
to prevent the sellers from immediately soliciting their old customers or competing with you.
Under New York law, covenants not to compete are valid as long as they are reasonable in
duration and scope. 3. Non-binding Nature of the Term Sheet. As
I discussed on my blog, you should consider having a “non-binding” term sheet. In
other words, are there contingencies when you can walk away from the deal without liability?
But note, the term sheet should be drafted properly so that certain provisions of the
term sheet are binding, like “limitation of liability” and confidentiality, among
others (you don’t want the seller to sue you nor disclose your confidential information
like financial information). 4. Post-Closing Buyer and Seller Obligations.
There might be times that you want the seller to continue to provide consulting services
to the business after the sale of the business. Maybe you decided to close the deal before
all of the non-material consents were obtained or prior to when the applicable taxes need
to be prepared and filed. Any post-closing obligation that need to be written in the
agreement should be included in the term sheet. So, which is better; an asset purchase or
a stock purchase of a company? From first impressions, you might think an asset purchase
is more advantageous. Generally, buyers prefer an asset purchase for reasons of tax deductibility
and cherry-picking the favorite assets. However, in a stock purchase you can buy the
business as a going concern with minimal interference of the business. Of course, the bottom line will be price – an
asset purchase will probably be more expensive than buying the stock of a company. If you are considering a buying a small business
in New York, make sure to check with your accountant and/or tax adviser and a Business
Lawyer. There may be important tax and other legal consequences to consider before making
the decision. For more details on this and other legal issues
please visit my website, www.nyccounsel.com.

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