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The Mistake of a Business Owner Regarding a Purchase Agreement

If you are going to purchase a business or sell your business there are several factors that a business owner will want to take into consideration. Business owners often make a mistake when they erroneously believe that a “simple” purchase agreement is sufficient. Consider the following hypotheticals:

Hypothetical #1: Susie’s Little Educators, Inc. is owned by Susan Queen. The business is licensed by the State of Minnesota. One of Susan’s key employee’s wants to purchase the business. They find a purchase agreement on the internet and use it. The agreement includes that the key employee will purchase the business under a new legal entity.

Analysis: Most likely the key employee will be shocked when it turns out that the license by the State of Minnesota requires pre-approval of the key employee as the new owner. Therefore, the new business will most likely be unable to operate for a lengthy period of time until the new business obtains the proper licensure, which is most often a several months, if not longer, process.

Tips: There are generally two types of purchase agreements. An asset purchase agreement is generally the sale of the assets rather than the entire business. A stock purchase agreement (the exact name of this agreement depends on if the legal entity selling is a corporation, a limited liability company, a partnership, etc.) is the sale of the entire business (certain items can be excluded from the sale such as bank accounts, accounts receivables, etc.). The difference is significant. In an asset purchase agreement, the assets are held by a different person or entity than the seller. In a stock purchase agreement, the business remains the same with the owner simply being different.

For further illustration, if Susie’s Little Educators, Inc. was sold under a stock purchase agreement, then the current license would transfer with the business – subject to approval by the state as required under applicable laws – and would continue to operate as Susie’s Little Educator’s Inc. with the same EIN, bank accounts, employees, liabilities, contracts, etc. In other words, under a stock purchase agreement, the business owner leaves and the business continues to operate. The only difference is that there is a new business owner.

It is tempting to take shortcuts in a sale of a business because what should be simple is rarely ever simple. Do not take shortcuts. There are several items that have to be determined in detail. For example, a review of contracts and leases has to be completed. A determination has to be made as to each contract or lease. Can it be assigned such as in an asset purchase agreement? Or is a change in ownership a triggering event under the default provision of the contract or lease?

Spangler and de Stefano, PLLP assists business owners in the purchase or sale of a business.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.