Tips for Buying and Selling a Business in Arizona

Phoenix business lawyers offer counsel on successful closure of the deal

In Arizona as elsewhere, businesses change hands frequently, and that is especially true of small or owner-operated enterprises. These businesses are closely held and their values are not easily measurable by usual market indicators. Careful research and sharp attention to detail are necessities. Whether you are on the buyer’s or seller’s side of a deal, focusing on a few important points at the onset can potentially make the difference between success and failure. At Law Offices of Donald W. Hudspeth, P.C. in Phoenix, our skilled attorneys focus on making certain that our clients’ objectives in business purchases and sales are achieved.

Buying a business in Arizona

Here are some areas of special concern for purchasers of a small or owner-operated business:

• The business broker — There are pros and cons to using business brokers. Some have good qualifications and understand the financial nuances of the deal. But brokers are paid their commissions only if the deal closes. Some feel they have no incentive to work with intermediaries like lawyers and accountants, whose advice in the broker’s opinion may slow the process of purchase and sale. But such advice is important on both the seller’s and the buyer’s side to vet the issues before the closing. If you do use a broker, do NOT use the broker’s purchase/sale forms. They are written to please both the buyer and the seller and typically offer inadequate protection for both. After the deal closes, issues may arise that should have been handled prior to the closing. Further, the form may have included a disclaimer saying that the parties have no claims against the broker.
• Due diligence — It is the buyer’s responsibility to investigate the target company to determine its financial performance, goodwill and reputation in the industry and community. Market and personal changes are often undisclosed. Often, the stated reason for selling a business is not the real reason. The seller cannot knowingly or negligently misrepresent the business, and the law will not protect those who do not protect themselves to a reasonable degree.
• The purchase agreement — Buying a business is not a mere exchange of forms. It is a zero sum game, and what one party gains the other loses. For example, the buyer will want the contract to include extensive representations and warranties, including provisions stating that the seller has the right to sell, that the sale will not breach any other contract, that the company and or assets are being sold “free and clear” of all liens and encumbrances and that the sales, profits, assets and net worth of the company are as portrayed in its financial documents. In contrast, the seller may want the contract to say the business and its assets are being sold “as is” with no representations or warranties at all.

An experienced business law attorney can assist buyers will all phases of the transaction, including due diligence and drafting of essential documents that are tailored to the particular circumstances.

Selling an Arizona business

When you are selling a business in Arizona, the same considerations apply as those discussed above except in reverse:

• The business broker — One advantage for a seller in using a business broker is the determination of an asking price. Brokers usually know what they are doing in setting prices. For example, if a small business has relatively low net profits due to its high owner salaries or use of company credit cards for quasi-personal expenses, the business broker will add back a fair portion of these expenses to obtain a true picture of the company’s earning power and cash flow and to determine the company’s fair market value. However, a disadvantage of using a business broker is the high commission, which is typically 12 percent. Because you need to transfer the business and/or its assets free and clear of liens, you must use the sales proceeds to pay off debt. So, for example, let’s say you are selling a business for $100,000 and the company has debts adding up to $90,000.00. This would mean a $10,000 profit to you, except that the broker would get 12 percent, or $12,000, off the top. That would leave you $2,000 short of what is needed to fully pay the commission. Sometimes, brokers will negotiate a pay out of the commission over time, but most prefer to take the money up front.
• Due diligence — For the seller, due diligence means producing information for the potential buyer to review. This can be dangerous if that buyer really just wants to learn your trade secrets and steal them. To help protect yourself, you will need one or both of the following: (1) a non-disclosure agreement, saying the potential buyer can’t use or disclose the information, with legal remedies stated, and (2) a letter of intent, which lays out the scope of the transaction and includes confidentiality provisions. In addition, you as the seller must avoid making unintended representations. Material misstatements or omissions can lead to lawsuits. As a general rule, withholding information or delaying its production is a strong signal to the buyer that the seller may not be trustworthy.
• The purchase agreement — Although you would like to sell the business with as few representations and warranties as possible, this probably will not happen. Among the most valuable parts of the deal for the buyer are representations that the business is free and clear of liens, that the stated financial performance is real and that the seller will not compete for the same clients in the same trade area and/or in the same type of business. Careful negotiation of these points is critical.

Seller-financed deals involve additional points of concern, so it is very important that the seller have a business attorney draft or review the promissory note, security agreement and personal guaranty that the buyer will sign in a seller-financed deal.

Contact an experienced Arizona business lawyer to handle your transaction

Law Offices of Donald W. Hudspeth P.C. is Phoenix’s business law resource. We can represent you as you prepare to buy or sell a business in Arizona. Call us at {PHONE} or contact us online.