If you are considering acquiring an existing business in New York, you will need to be mindful of many important issues prior to entering into the applicable purchase contract. Business acquisition transactions, and the New York State laws applicable to them, can be unforgiving traps for imprudent buyers.
An initial consideration will be how to structure the business acquisition. One option is for you to buy all the shares of the corporation (or other entity). Buying a business through a share purchase can be more challenging for the buyer and riskier from a liability containment standpoint. It can be more difficult for the buyer to avoid assumption of unwanted, or unknown, liabilities of the purchased business.
As a result, many business acquisition transactions are instead structured as asset purchase transactions. In this type of transaction, the buyer has the option to select the assets and liabilities that it wishes to purchase from the selling corporation.
In addition, tax matters are a key consideration in structuring business purchase transactions. Business purchases structured by the asset purchase method typically provide for lower taxes for the buyer going forward, primarily because an asset purchase allows for a step-up in the tax basis of the purchased assets and, in turn, generates depreciation and amortization deductions. Business sellers, on the other hand, usually have to pay higher taxes on asset sale transactions, so tax issues often become points of negotiation between buyer and seller.
While an asset purchase structure can help mitigate your exposure to seller liabilities, you should still perform a due diligence review of the target business before negotiating all of the contract terms. It is important to know what you may be buying. A thorough due diligence process will help address numerous issues of concern to a careful buyer. For example, you will need to know who all the shareholders and directors of the selling corporation are to confirm that they all consent to the sale of the business. In addition, it is critical to order a lien search on the selling corporation to determine whether its assets are free and clear of any liens or other encumbrances, such as whether it is a party to a lawsuit or if there are any outstanding tax deficiencies. When an industrial business or commercial property is involved, you would need to conduct environmental inspections. It is important to ensure that the company is meeting its legal requirements to carry on its operations, including confirming that the business has all necessary governmental permits and that there are not any outstanding violations.
Your due diligence review may not reveal all existing or potential liabilities, so you will need to negotiate effective representations in the purchase contract. The purpose of such representations is to have the seller “represent” to you that all the assumptions you are making in buying the business are in fact true. These representations typically provide that the selling corporation owns the assets free and clear of all liens and other encumbrances, the purchase transaction has been duly authorized by all shareholders and directors of the selling corporation, no third party consents are required for the sale of the business, there is no outstanding, pending or threatened litigation regarding the business and there are no outstanding tax obligations owed in connection with the business.
The asset purchase contract would also provide that, if the buyer incurs any liability due to any of the representations being untrue, then the selling corporation and its shareholders would indemnify and hold the buyer exempt from any such liability. When negotiating the indemnification provisions in an asset purchase contract, it is important to require that the shareholders of the selling corporation will be subject to the indemnification obligations. Otherwise, your only recourse would be to the selling corporation, which likely will no longer have the assets necessary to satisfy the indemnification obligations.
The New York State Department of Taxation and Finance can hold a buyer of a business liable for the seller’s sales tax liabilities, even if the transaction is structured as an asset purchase and the contract expressly excludes assumption of the seller’s sales tax liabilities. Therefore, it is critical that you obtain tax clearance from the New York State Tax Department prior to the closing of the purchase transaction. The Tax Department requires that, at least 10 days before either paying for or taking possession of the business assets, whichever comes first, the buyer must file a form with the Tax Department to notify it of the pending asset purchase transaction.
The notice to the Tax Department protects the buyer from the selling corporation's tax liability prior to the sale of the business assets. The Tax Department must then give notice to the buyer within 5 days of receiving the buyer’s notice that tax may be due. It will then have an additional 90 days to review the selling corporation’s books and records and to assess any tax dues. If the state does not make the assessment within 90 days of having received notice of the sale, tax liability may not be assessed against the buyer. The buyer may be required to withhold funds sufficient to discharge any tax liability that is determined to be due, and the failure to withhold will make the purchaser personally responsible for any taxes assessed within the 90-day period.
Real Estate Lease
Many businesses do not own the buildings in which they operate. When acquiring a business with a physical presence, such as a bar, restaurant or retail store, among the most critical aspects of the transaction will be the lease for the business’s premise. In some cases, the landlord will consent to having the seller assign its lease to the buyer, while in many other instances, the landlord will require the buyer to enter into a new lease. The landlord’s consent to the assignment of the lease or entering into a new lease must be a prerequisite to the closing of the purchase transaction.
After having spent a great deal of money to acquire the business, the last thing you want is for the seller to open up the same type of business next door, or to take the clients or employees of the business which you just bought for the seller’s next business venture. A well-written restrictive covenant provision in the purchase contract can prevent this. Examples of restrictive covenants include non-compete agreements and non-solicitation agreements (preventing solicitation of customers and employees).
Business purchase transactions can pose considerable risks to buyers. Each transaction is different and must be meticulously reviewed by a qualified attorney to recognize and advise how to address potential risks. Negotiating important terms in the purchase contract will help avoid undesirable outcomes and the possibility of costly and time-consuming litigation.
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