Question

What are the main issues of concern when buying or selling a business in California?

Gregory A. Nylen

Answered by:
Gregory A. Nylen

Located in Murrieta, CA
Lobb & Plewe, LLP

Gregory A. Nylen - Intellectual Property Litigation - Super Lawyers

Answered by: Gregory A. Nylen

Lobb & Plewe, LLP
Murrieta, CA
Phone: 951-788-9410
Fax: 951-788-0766

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Answer

There are numerous factors to consider when buying or selling a business. The most important are tax liability and successor liability. 

  1. Tax implications of a merger or acquisition 

In any transaction, both parties want to ensure that their tax liability is minimized. Buyers and sellers, however, benefit from different acquisition structures to minimize their respective tax liabilities. 

Most business acquisitions end in what's called an "asset sale," as opposed to a full stock sale. This structure is generally preferred by buyers. This means that the buyer technically does not purchase the company, but instead buys the assets, such as equipment, inventory, licenses, and customer lists. The buyer will receive a "step up in basis" for the purchased assets, allowing for greater depreciation or amortization of the assets. 

For sellers, an asset sale may result in higher taxes because some assets may be subject to ordinary income rates rather than capital gains rates. Additionally, sellers will face double taxation if their entity is a C Corporation: once when the corporation receives the sale proceeds and again when the proceeds are transferred out of the C Corp to its owner. Because of this, sellers generally prefer the acquisition to be structured as a stock sale, which provides sellers with lower taxes at the capital gain rates and avoids double taxation. 

    2. Avoiding successor liability 

“Successor liability” refers to the responsibility that a buyer holds for actions taken by the seller prior to the sale. Naturally, a seller wants to walk away with as little responsibility as possible, and the buyer wants to ensure that they are taking on as few as possible. There is no perfect world here: each party must protect themselves. If you are selling, you will want to make sure you get insurance, and if you are buying, you will want to be sure you have a hold-back of a portion of the purchase price and a strong indemnity provision to protect you.

Successor liability is one reason that buyers often want to use escrow: so that the escrow company can do the due diligence. 

How To Protect Your Interests During A Transaction 

Whether you are buying or selling, a merger or acquisition is a difficult transaction with a lot of implications and long-lasting effects, particularly when it comes to tax and successor liabilities. An attorney experienced in business or commercial law is a great asset when pursuing a transaction, as he or she can look out for your interests.

Disclaimer: The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.

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