The Mistake of a Business Owner in Purchasing a Business
Hypothetical: Heidi and Gail want to purchase Couture Cupcakes, Inc. (CC). CC’s business attorney drafts the documents for the sale, and Heidi and Gail believe that the documents look reasonable. They do not consult with a business attorney prior to purchasing CC. After they purchase CC, numerous problems arise. Heidi and Gail seek the advice of a business attorney.
Issue: Three months after the purchase, Heidi and Gail find out that there were leases and contracts in the name of CC. Heidi and Gail claim that they are not responsible for those leases and contracts, which total $150,000 in liabilities. Analysis: In reviewing the purchase agreement, the business attorney tells Heidi and Gail that they did a stock purchase agreement rather than an asset purchase agreement. Generally, the difference is that in a stock purchase agreement, you are also “purchasing” the debts along with the assets. The purchase agreement clearly states that Heidi and Gail are responsible for the leases and contracts, which Heidi and Gail never thought to ask to review prior to closing on their sale. Heidi and Gail are responsible for those leases and contracts under the terms of the stock purchase agreement.
Issue: Six months after closing on the purchase of the business, Heidi and Gail are having difficulties with a couple of employees. Heidi and Gail “inherited” all of the employees in the purchase, and want to know if they can just fire the two employees.
Analysis: Heidi and Gail confirm that there are no employment contracts with any of the employees. However, there is an employee handbook that CC used prior to the purchase that Heidi and Gail have continued to use. The employee handbook has an extensive progressive disciplinary policy. The business attorney counsels Heidi and Gail that they need to follow the progressive disciplinary policy, and cannot outright fire the two employees, but they have to go through the steps required in the policy. In addition, the business attorney advises that the employee handbook is revised to change the progressive disciplinary policy to a policy that allows the company to terminate employees for any reason (unless it is discriminatory or retaliatory). At the same time, the business attorney recommends that the employee handbook is modified to comply with the law – as it currently requires that FMLA is followed even though that law applies to businesses that have 50 or more employees, which CC does not – and fits within the new owners’ business goals, etc.
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