When You're Buying a Company's Stock Instead of Its Assets by Cliff Ennico on Creators.com

Recently

‘If You Can't Convince Them, Confuse Them' "I run a small contracting business. I have been hired as a subcontractor on a large construction project — a 40 story downtown office building. "I am told there are more than 70 different contractors who will be working on this …Read more. How to Impress the Judges at a Business Plan Competition (Part II -- Ventures) I was pleased to be one of the judges at the 16th annual Connecticut Business Plan Competition sponsored by The Entrepreneurship Foundation. Each year, dozens of teams from the entrepreneurship classes at Connecticut's private colleges, state …Read more. How to Impress the Judges at a Business Plan Competition: Part I -- Personal Business I was pleased to be one of the judges at the 16th annual Connecticut Business Plan Competition sponsored by The Entrepreneurship Foundation (www.entrepreneurshipfoundation.org). Each year dozens of teams from the entrepreneurship classes at …Read more. Dealing With Sales Taxes When Selling at Out-of-State Trade Shows and Conventions "I sell collectible stamps and coins on eBay and locally. I currently collect sales tax in the state of California. Beginning next year, when I retire from my day job, I want to start travelling around the U.S. going to big stamp and coin …Read more.

When You're Buying a Company's Stock Instead of Its Assets

"I run a small retail store in my town.

"One of my competitors is retiring, and he's given me the chance to buy his business. He's got a ton of valuable inventory, which he's willing to sell to me at a discount.

"The problem is, he has several contracts with his suppliers that can't be assigned over to me. These contracts are at good rates and highly desirable.

"His attorney has suggested that I buy the stock of my competitor's company, rather than buying the business assets, which I realize would be better for me.

"We need to get this done in the next couple of weeks, so there won't be a lot of time to do a thorough 'due diligence' review of his business. What are the really horrible things I should get straightened out before I take the risk and buy this business?"

Generally, when you buy the assets of a business, you don't assume any of the business liabilities except for those you expressly agree to assume. You can cherry pick the ones you want.

When you buy the stock of a business instead, you take over the entire business, good and bad, liabilities as well as assets. Including liabilities you may not know about.

Here are some things to think about in the next few days:

1. Form a new company to own the stock. Since you don't have time for a proper due diligence examination, consider forming a limited liability company (LLC) and having the stock owned by the LLC rather than you personally. That way, if there are unexpected lawsuits or claims against the business and they pierce the corporate veil to reach the owner's assets, you will have one additional layer of protection before the creditor can get to you personally.

2. Look at the company's lease. If you are planning to continue the business at its present location, you and your attorney need to spend a couple of hours looking at the owner's current lease. Here are the key questions:

—How many months remain in the lease term, and are there options to renew for additional periods?

Does the lease terminate if there is a change of control of the tenant (if so, you will need to obtain the landlord's consent before you take over the business)?

—Are any repairs necessary that are the tenant's responsibility?

—Is the current owner in default under the lease (consider asking the landlord for an estoppel certificate certifying that there are no defaults under the lease on the day you take over the business)?

Check for liens and lawsuits against the company. Have your attorney do a quick online search for liens filed against the company (for example, by a lender or leasing company) and any pending lawsuits or judgments. This should take roughly one hour of your attorney's time (longer if he finds anything and has to review it).

Get copies of the owner's insurance policies, and make sure he is adequately covered for the most common business risks. Ask your insurance broker to contact the companies who issued the policies and have you named as an additional insured on each one.

4. Have your accountant review the business tax returns. Look at the business' income tax, sales tax and employment tax returns for the past three years (including the current year-to-date). Have your accountant tear these apart and point out things that don't make sense. If there are no tax returns, head for the hills.

5. Get "hell or high water" indemnities from the business owner. Since you don't have much time to kick the tires, make sure your purchase contract contains the owner's personal indemnity for anything that goes wrong during the first year you own the business if it wasn't disclosed to you beforehand and if the amount needed to solve the problem is more than $1,000. An indemnity means he is responsible for cleaning up the mess and/or reimbursing you any money you have to spend out of your own pocket to solve the problem.

6. Hang out there for a few days. Since you only have a couple of weeks to close the deal, spend at least a couple of hours every day hanging around the business, talking to the owner, his employees and (most importantly) seeing what actually happens with customers. What is the average daily traffic volume? Are things busier at certain times of day? Are people "showrooming" the merchandise (coming in, asking tons of questions, trying out different models, then going home and buying their choice online)? How do the employees treat customers? Are they motivated, or sitting around reading magazines if they don't have anything else to do?

Living the business for even a couple of days, while no substitute for a proper due diligence examination, will give you a wealth of real world information that no financial statement, tax return or legal contract ever can.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.

DISTRIBUTED BY CREATORS.COM