Buying or Selling a Business isn’t like Buying or Selling a Candy Bar

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KeysSome people think that buying a business is a cinch, as easy as buying a candy bar.  It’s not. You can’t say, “Here’s X dollars; give me your computer and the key to the office (or to the truck, or whatever); and go enjoy the rest of your life.”

It’s the same if you want to sell a business. You can’t say, “Pay me X dollars right now, I’ll hand you this key and the computer, and then I’m outta here.”

You want a clean purchase and sale, right? Without any bad after-effects. So figure on resolving a bunch of matters up front.

Don’t want to? Prefer the candy bar route? In that case, it’s almost a law of nature that the business buyer will end up paying more than he or she expected to pay.  Or the seller will ultimately get less than what was expected.  Maybe both.

And these unpleasant money hits might not even appear until months after the sale takes place.

What’s the difference between the candy bar and a business? For openers, a candy bar has no owner other than whoever holds it. No piece of paper certifies who owns the candy. You holding the Snickers? It’s yours.

Ownership of a business is different.  Formal documents show who owns the shares, membership interests, owner interests, units, whatever you want to call ’em.

That’s because you can’t hold a factory in your hand, or a warehouse full of inventory, or a roomful of computers.

So you can’t just hand over the keys. Particular paperwork is needed to change ownership.

IRS has an interest in these certificates, too, and the ownership before and after.  IRS wants to know about the transaction. It’s the same as the purchase and sale of publicly-traded stock.

Your business could be a part-time one-person operation or have lots of employees on three shifts. Your operation could sell goods, sell services, manufacture, practice a profession, rep lines, or do consulting.  IRS will want to know the value of the business by how much it was sold for.

Other people have to be reckoned with, as well — people who could care less about your candy bar but will be extremely interested in the purchase and sale because it will affect them.

Consider the landlord if your business rents space. If the rent isn’t paid, who does the landlord get to sue? The business’s seller who signed the lease originally?  The buyer who is supposed to be taking over the tenant obligations?  Or can the landlord sue both?

In such circumstances, you want to make peace with the landlord before the purchase and sale is closed. The time to discuss this is not while the buyer is being evicted and the seller is on some yacht in the Caribbean.

Or what if the seller is still due money from his or her old customers, patients, or clients at the time the business is to be bought or sold? Who’s entitled to the cash, checks and credit card payments after the purchase and sale?

Does the buyer get to keep what those customers pay to the business? Or should the seller write all those customers, telling them to send their payments to seller at a new address? Maybe the buyer was counting on that money for cash flow – but what if the seller was counting on that income, too?

There’s no right answer here either. But the buyer and seller better agree on something before the sale takes place.

Others would be concerned. How about the bank, the employees, the companies leasing equipment or who sold equipment and are being paid over time?  How about the vendors?  The list goes on and on, and it’s unique to the type of operation.

This takes us to the punch line: when buying or selling a business, it’s best to start with a document spelling out exactly who-gets-what and who-does-what.  It’s generally called a purchase agreement and no, there’s no “standard” one. You can’t sell a consulting operation like a gas station.

With such an agreement, you avoid surprises.

And don’t be a Pollyanna. If buyer and seller are getting along famously, and when discussing terms, they say, “Oh that detail is not a big deal. We can work it out later,” that’s an invitation to litigation.

Unless all the details are worked out in a purchase agreement before money and ownership papers change hands, one side or the other is probably going to get stuck – and then sue.

The moral for today: candy may be dandy, but litigation over a fouled-up, rushed-into, un- or under-documented purchase and sale of a business isn’t sweet at all.