Buy Sell Agreements

One of the problems that you may encounter when buying a business in New York is understanding how to structure the purchase.  Basically, there are two ways that you can buy a company:

  1. Asset Purchase;
  2. Stock Purchase.

In most cases, you will be better off purchasing the assets. There are three big benefits to buying the assets and not purchasing the stock:

  • Tax benefits. With an asset purchase, you can give different purchase prices among the various pieces of the company.  For example, certain equipment can be deducted immediately so you may want to assign a greater price for those assets.
  • You can choose not to acquire liabilities of the business you wish to buy. Perhaps the company failed to pay a supplier for goods it ordered two years ago.  The statute of limitations on a breach of contract lawsuit is six years, so you could be hit with a lawsuit four years after buying the company.
  • You don’t have to buy every asset of the corporation. It could be in you best interest to buy only the profitable portions of the company.

Sometimes you are not given the choice of how a business sale could be structured.  Many business that are for sale require purchase of stock only for a variety of reasons. For example, the seller may believe that there are tax advantages for selling all the stock.  If you have to buy corporate stock, it is imperative to conduct a thorough investigation of the corporation’s books and other financial dealings.  You can insert warranties and indemnification clauses in the stock purchase agreement. You may also be able to purchase insurance.

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\"\"Deciding partner compensation when starting up a company is critical.  Without a fair and just written compensation  provision in a partnership agreement, the business can implode.  Here are 4 things you should think about when deciding how partners should be compensated:

  1. When will profits be divided? Will it be once a year, at the end of the year or will partners be able to draw their profits at some earlier point?
  2. Should a partner receive a additional salary? In the case where one person may work more hours than the other partners, it is advisable to either pay an additional salary or provide a larger portion of the profits.
  3. Should profits and losses be shared equally?
  4. Should a certain percentage of the profits be re-invested in the company? For example, it may be important to retain some of the profits to provide a bonus to keep a key employee.

It is vital that you and your partners how decide profits should be shared as early as possible.  A lawyer can help you focus on what is important and select solutions. But ultimately, it is up to you to decide how profits are allocated.

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\"\"New Yorker\’s are a mobile bunch. Especially New York business owners. Business open and close every day.  It is risky to believe that your co-owners will still be with you five years down the line. It is likely that there will come a time when of your co-owners will want to sell his shares or interests in the company to someone else.  One of the most common ways that a small business can get disrupted is when an owner desires to sell or transfer his interests in a company. So, what should you do?  You should create in advance a method for the owners to review and block any that is not in the best interests of the company.  Here are some things you should think about:

  1. Right of First Refusal. This is the most common provision in a buy-sell agreement. The owner who wishes to sell his interests first offers it to his co-owners before anyone else.
  2. Decide the Price of the Ownership Interests in Advance. Often the price will be set at the price a proposed outside buyer has bid.  I do not recommend this option because a fraudulent offer is possible. Another method is to set a pre-determined price at the time a buy-sell agreement is drafted.  Another option is to set a high down payment price which would show good faith.
  3. Make clear the effect of any sale on Minority Owners. Often a right of first refusal provision may freeze out a minority owner from selling his interests.  As a result, it may be important to include a \”Right to a Forced Sale\” clause.
  4. Decide who can buy the interest. Should the company have the right to purchase shares or the individual owners?
  5. Should an owner be able to give away his interest? Often owners wish to grant their interests in a company to a trust for estate planning reasons. This could be problematic because technically the trust would own the shares of the business. Often these issues are addressed when drafting a buy sell agreement.
  6. No Transfer Restrictions. Refusing to transfer any ownership interest is another possibility. This can limited in a few different ways, such a no transfers to certain persons and no transfers without written consent of the other owners.

You should decide in advance what to do if an owner of a business wants to transfer its interests through a buy sell agreement to avoid unnecessary problems and potential litigation.

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