Buying a Business in Texas
Buying a business is always an exciting adventure. However, it can also be intimidating. Texas law does not contain many provisions related specifically to the purchase of most businesses. Instead, general statutes and a lot of common law enters into the picture.
Generally, businesses are purchased in one of two ways: (i) a purchase of all the assets; or (ii) a purchase of all the equity (whether stock, units, membership interest, or otherwise). From the buyer’s perspective, it is usually safer to purchase all the assets of an existing business. In doing so, the buyer only receives the liabilities to which it agrees. Documents include an asset purchase agreement, a bill of sale, and schedules of assets of assumed liabilities, among other things.
On the other hand, a purchase of the equity often requires the buyer to assume unknown liabilities. To protect the buyer in a stock purchase agreement, the buyer may request the seller to holdback a certain portion of the purchase price. The holdback could be left in escrow, or maybe the purchase price is paid in two sums instead of one. The purpose of the holdback is to protect the buyer from any unknown liabilities. Typically unknown liabilities include unpaid unemployment taxes, unpaid accounts, or claims that have not availed themselves at the time of the closing. Generally, documents required for an equity purchase include a stock purchase agreement (or equivalent), an assignment, an indemnification agreement, a schedule of assets, and a schedule of liabilities.
Perhaps one of the most often overlooked aspects in the purchase of a business is the potential fluctuation of the purchase price. One of the most important factors is the inventory. Other factors that may cause the purchase price to fluctuate include cash-on-hand, uncollected receivables, and outstanding utility bills. Regarding inventory, Buyers often expect the seller to retain enough inventory to last another month. Sellers, on the other hand, want to minimize any cost that extends beyond the closing date. It is not rare for the buyer and seller to schedule a meeting the day prior to closing to count inventory, consider cash-on-hand, accounts receivable, and outstanding bills. Then the purchase price is modified accordingly. Alternatively, the buyer and seller may agree on set amounts or to otherwise rebalance within thirty days following the closing.
Another component often seen in the purchase of businesses in Texas includes a promissory note and, often, a security agreement. Many times, the seller will “carry” a note for a percentage of the purchase price. Repayment of the note may be secured by a security agreement. In doing so, the seller may foreclose on the purchaser’s interest in the business if it fails to repay the loan.
Buyers should always be diligent when purchasing businesses. Be sure to perform proper due diligence. Buyers should try to verify any financial data, review third party contracts, and, most importantly, study the terms of an existing lease. And always, the buyer should communicate with the landlord prior to closing on the business.
The Law Office of Robert Newton, P.C. practices law in the area of real estate, business, and estate planning in Frisco, Texas. None of the information contained within this post represents legal advice.