Whether you are buying or selling a business, the following checklist can help to avoid problems.

1. Sale Structure. Is the sale an asset purchase, stock or equity purchase or a merger? If an asset purchase, then the buyer typically chooses which assets or liabilities he/she wants. The price may be higher and the deal more complex however. If a stock or equity purchase, then there may be price advantage to the buyer as the liabilities of the seller will be included. If a stock purchase is paid for in installments, consider who votes the shares until the purchase price is paid. There may be tax advantages or disadvantages such as whether ordinary income tax rates or capital gain tax rates apply. Involve your tax advisor or CPA early on.

2. Third Party Approvals. Depending on the type of transaction, approval from the board of directors and shareholders may be needed. Consider the timing of these approvals, and any disclosure needed to avoid delays. Consider whether a unanimous vote is needed or a simple majority. Dissenters may force a purchase of their shares at “fair value.” Consider whether there are licenses or permits needed to operate the business that require prior approval before transfer.

3. Due diligence. The buyer should ask for and obtain as much of the seller’s financial information as possible. Use letters of intent and make purchase contingent during feasibility period. If seller wants to maximize the sale price, prepare early by making sure financial information is current and accurate. A common reason for post-sale litigation is the alleged inaccuracy or misrepresentation of the seller’s financial information. Non-disclosure agreements will be needed to protect confidentiality.

4. Intellectual Property. The seller and buyer need to identify whether the patents are transferable. Consider also whether there are outstanding license agreements in place. Verify the rightful owner of the patents, copyrights, trade names or trademarks included in the sale and obtain proper assignments. Identify whether the domain names and websites are part of the transaction.

5. Representation and warranties. The buyers will want the seller to make contractual representations and warranties about the accuracy of financial information, the stock ownership and consents, title to and condition of the assets, among others things. Make sure you do not accept more contractual liability than necessary. The buyer will typically want these provisions to survive closing and or may insist on their accuracy as condition of closing the transaction. The seller will want to limit his/her post closing liabilities.

6. Existing Property Lease. If taking over the seller’s lease, make sure the landlord has approved the buyer, or make the purchase contingent on a new lease. Determine who owns the security deposit. Consider any environmental liability risk.

7. Employees. Determine whether any employees are staying with the business. If there are anticipated layoffs make sure that the seller has or will comply with the “Warn Act,” if applicable. Are the seller’s employees subject to non-compete restrictions? If you are going to maximize the sale value, you should consider putting employment agreements in place long before offering the business for sale. Consider whether key employees are necessary to operate the business during transition. Consider post-closing confidentiality concerns and whether current or former employees are subject to confidentiality requirements.

8. Financing. If the seller is financing some or part of the sale, then he/she needs to think and behave like a lender. Obtain personal guarantees and perfect security in the collateral. Obtain a stock pledge agreement and make sure it is secure. Consider what happens if the buyer defaults – does seller want the business back? Consider whether some of the purchase price should be deferred and based on post closing performance. Use employment agreements to pay some of the sale price to the seller’s principal as wages.

9. Confidentiality. Are there legal competition concerns? The use of a non-disclosure agreement is essential to preserve trade secrets and confidentiality. If the seller wants anonymity, consider forming a new entity outside of Arizona.

Buying or selling a business in Arizona can be an emotional ride with bumps along the way. If you need legal assistance in your sale, purchase, and merger; such as help with a sales and purchase agreement, or buy sell agreement – we have the experience to guide you. Contact us today at 480.664.7728.