Business Asset Sales, Stock or Membership Interest Sales, and Mergers

The purchase and sale of an existing business can be structured in one of three ways: as an asset sale; stock or membership interest sale; or as a statutory merger or consolidation. We have material experience representing buyers and sellers in each, and each presents its own tax and risk implications which are more or less favorable depending on whether you are the buyer of the seller. Our clients’ transactions generally range in value from $200,000 to $18,000,000 and reflect small to medium sized businesses operating in Silicon Valley: App service providers, software development companies, electronics manufacturers, e-commerce retailers, construction companies, professional practices, franchises, industrial component distributors, restaurants, UPS routes, Amazon routes, day-care facilities, and wholesale food distribution. Some client transactions come to us from business brokers, and we make introductions to business brokers and investment bankers when sell-side clients come to us seeking guidance on valuation and business sale marketing.

Pre-transaction Planning, Cleanup, and Deal Structure

A primary task of counsel is to work with you, as seller or buyer, and often with your business broker, investment banker, or CPA, to assess feasible deal structures and tax efficiencies, valuation range, and negotiate with the intended counterparty a nonbinding term sheet or letter of intent (LOI) laying out key terms and conditions for the potential sale. While technically non-binding, matters covered by the LOI are, as a matter of convention and good faith, expected to be reflected in the final negotiated (the definitive) transaction agreement. So, before signing an LOI, it is generally a good idea to consult counsel, who, if experienced, will likely have practical suggestions for matters you may not have thought to include in the LOI. Additionally, when we represents selling SMBs, particularly family or closely held entities, it is often appropriate before exposing the company to due diligence disclosures to work with seller and its advisors to conduct pre-transaction cleanup of corporate governance matters, securities law compliance, employee contracts, intellectual property rights documentation, and financial records – and avoid later foreseeable delay to transaction momentum should deficiencies be left unaddressed until raised by a sophisticated buyer’s due diligence.

Due Diligence

Due diligence is the process through which the buyer assesses the selling business’ value, risks, prospects, and overall fit. It often begins with a list of items prepared by buyer’s counsel or business broker/investment banker delivered to the seller. This list’s length and substance varies based on deal size, business structure, and complexity. Buyer’s diligence elicits from buyer affirmative statements and copies of records on entity structure, ownership, securities regulatory compliance, management, number, size, and concentration of customers, identification of assets, debt, claims, corporate governance, employees, employment contracts and benefit agreements, general contract compliance, tax returns and financials – generally for three full years and current year to date. Due diligence precedes or can occur concurrently with the drafting of the definitive sale agreement, the first draft of which is generally presented by buyer. When working with you as buyer, we incorporate the results of seller’s diligence disclosures into the definitive purchase agreement as series of Seller representations and warranties – statements which if false or not accurately qualified may support grounds to claw-back part of the purchase price. When representing sellers, we work with you to create a so-called disclosure schedule – an exhibit to the primary agreement supplementing seller’s representations and reflecting – for example, copies of the financial statements or stating or carving-out exceptions to affirmative statements set forth in the representations and warranties.

Negotiation and Drafting of Definitive Agreement

A primary task of counsel is to work with you, as seller or buyer, and often with your business broker, investment banker, or CPA, to assess feasible deal structures and tax efficiencies, valuation range, and negotiate with the intended counterparty a nonbinding term sheet or letter of intent (LOI) laying out key terms and conditions for the potential sale. While technically non-binding, matters covered by the LOI are, as a matter of convention and good faith, expected to be reflected in the final negotiated (the definitive) transaction agreement. So, before signing an LOI, it is generally a good idea to consult counsel, who, if experienced, will likely have practical suggestions for matters you may not have thought to include in the LOI. Additionally, when we represents selling SMBs, particularly family or closely held entities, it is often appropriate before exposing the company to due diligence disclosures to work with seller and its advisors to conduct pre-transaction cleanup of corporate governance matters, securities law compliance, employee contracts, intellectual property rights documentation, and financial records – and avoid later foreseeable delay to transaction momentum should deficiencies be left unaddressed until raised by a sophisticated buyer’s due diligence.