Buying a Business in Arizona
Brokers, Pros and cons: Business brokers are a good place to find an Arizona business. They often have good qualifications. In fact, some are attorneys or former attorneys or accountants. And they understand financial statements and can help evaluate how lucrative a business can be. However, business brokers take an extremely high commission right off the top (discussed below in the section on SELLING YOUR BUSINESS IN ARIZONA). Business brokers only get paid if the deal closes. They have no incentive to work with intermediaries like lawyers and accountants, but rather to simply get the deal done and get their check, which can often exceed the down payment to the seller (see below).
It is important that you do NOT use the broker’s purchase/sale forms. They are written to please both the buyer and the seller and often contain inadequate protection for both. Often, issues that should have been handled prior to the closing arise and the contract does not contain language to deal with the situation. In most nearly every case, the broker will have each party sign a Disclaimer saying that the parties relied on themselves and each other and waive all claims against the broker. This leaves the buyer and seller looking at each other, asking themselves: “What did we just agree to?”
Entities, Agreements & Formations Due Diligence in the Purchase of an Arizona Business
“Due Diligence” is the process of investigating a company to determine its financial performance, goodwill and reputation in the industry and community. Market and personal changes are often undisclosed. Usually the stated reason for selling is not the real reason, and the law will not protect those who do not protect themselves to a reasonable degree. While the seller cannot knowingly or negligently misrepresent the business, YOU have the duty to ask the right questions and to get the answers. Often this Holland Law Group encounters situations where the buyer asks for documentation, but the seller convinces the buyer that it is not necessary, is not available, would come later, etc. Often these answers are untrue and just “stonewalling” in the hope that you will either forget or simply buy the business anyway. Consequently, you may wind up, as one client did, paying a large sum of cash for a piece of equipment the seller did not even own; it was leased. Brokers often have “Disclosure” forms that they have the Seller prepare, but if you compare that form to the Disclosure Form a house seller must complete in Arizona, you can see how inadequate the typical broker’s Disclosure form is.
The Agreement for Your Purchase of a Business in Arizona
Whether you are buying a business in Arizona or selling a business in Arizona, it is NOT a form transaction. Clients sometimes do not understand that legal representation in the purchase or sale of a business is an adversarial transaction – a zero sum game. That is, what one party gains the other loses. You will see this by comparing some examples of what the buyer wants and needs in the transaction versus what the seller wants and needs.
For example, the buyer will want the contract to include extensive “Representations and Warranties,” including provisions which state the seller has the right to sell, the sale will not breach any other contract, the company and or assets are being sold “free and clear” of all liens and encumbrances, and the sales, net profits, assets and net worth of the company are as portrayed in the company’s financial documents which the buyer reviews as part of Due Diligence. These representations and warranties can be quite extensive.
In contrast the Seller may want the contract to say the business and its assets are being sold “As Is” with no representations or warranties at all. Obviously, this is a huge conflict and helps explain why hiring one attorney to represent both sides, or just using a “form” is a recipe for disaster.
In the real world “one size does not fit all” and the contract must be tailored-made to reflect the facts and circumstances of the deal. The buyer will also want a non-compete. Thus, buying or selling a business is one of the more important events of your life and needs to be treated as such.
Selling an Arizona Business
When you are selling a business in Phoenix or Arizona the same considerations apply (as those discussed above) except in reverse.
The Business Broker: In addition to the dangers and considerations mentioned above, some key points for the Seller in using a business broker are determining the purchase price and commission. Brokers sell businesses, and typically they know what they are doing. For example, the typical small business has a relatively low net profit for reasons which include the following: high owner salaries (e.g. paying oneself a high salary when you could hire a manager at a substantially lower salary), use of company funds like credit cards for quasi-personal expenses (like cars, art on the wall, etc.). The business broker knows this and will help you add back a fair portion of these expenses to obtain a true picture of the company’s earning power and cash flow. Then, the broker may use a multiple – based on industry standards – of this adjusted net profit or cash flow to determine the company’s “fair market value”. This fair market value becomes the “list price” or “asking price” of the company. This “add back” process is good because it adds value to the seller.
A negative point to the seller for using a business broker is the commission, which is typically high and taken right off the top. Sometimes, brokers will negotiate pay out of commission as money is received but this cannot be counted on.
Due Diligence in the Sale of a Business for the Seller
Selling a business – or buying a business – requires some work. For the Seller, “Due Diligence” means producing information for the potential Buyer to review. This can be dangerous because the potential Buyer may simply want to learn proprietary information about your business. To help protect yourself you will need one or more of the following: (1) a Non-Disclosure Agreement, and (2) a Letter of Intent, including among other things, confidentiality provisions. The seller of a business also needs protection from unintended representations. Material misstatements or omissions can lead to fraud or negligent misrepresentation lawsuits. Intentionally withholding information or holding back production of unfavorable information in the hope the Buyer will buy anyway is a strong signal to the Buyer that the Seller is not trustworthy. But, Buyers are often anxious and if unrepresented by business legal counsel, may do foolish things.
Also very important for the Seller are the “loan documents.” These include the promissory note, security agreement and, perhaps, personal guaranty that the Buyer will sign if the Seller finances the deal. Generally, wherever possible, the Seller should attempt to avoid financing the deal – at least no more than necessary. The ability to collect the amounts due is only as good as the loan documents. It is very important that the Seller have a business attorney draft or review these documents.
These are just some of the things you need to know about the purchase of a business or the sale of a business in Arizona. The attorneys at Holland Law Group, PLLC are happy help with your business needs. Call now to schedule a consultation.