Legal Information for Large and Small Business Owners
Posts tagged Nondisclosure
Buying a Small Business, Company or LLC in New York
May 27th
This is intended to help outline the general process of buying a small business in New York, explaining the legal aspects of how a corporate attorney can assist in a business purchase transaction (it is not intended to be construed as legal advice for your particular situation).
Your business acquisition attorney is not only your legal expert, but also will facilitate the business purchase process. Your business lawyer will coordinate the processes, interface with all the players, and move the business transaction along, culminating in a successful closing. As your legal expert, your business lawyer will conduct the legal due diligence, negotiate, draft and review the necessary legal documents, and should be intimately familiar with the legal intricacies aspects of your business purchase — keeping abreast of the facts and circumstances of the deal and advise you on any resulting legal consequences, and preparing the strategies to avoid legal problems.
1. Of course, the first step in buying a business is to find a business to buy.
You can find businesses to buy in the classified section of most metropolitan newspapers, on those newspapers’ websites, in the Wall Street Journal, through your own networking efforts – whether in person or on the internet (like LinkedIn or Facebook), or through business brokers. Corporate lawyers generally do not sell businesses unless they act as a broker or finder or happen to know a client or acquaintance who wants to sell a business. There are tons of businesses for sale — the question is whether acquiring the business makes economic sense (and is the right business for you).
After you have identified the possible acquisition target, you (with the assistance of your corporate attorney) need to conduct due diligence on the business (investigate the business, its contracts, customers, financial reports, among other things) and determine what the business is worth and the terms of the purchase. These steps are not mutually exclusive, they are interdependent and occur simultaneously — as you find out facts about the business, these may reflect on the business terms of the deal.
2. The “Term Sheet” — Negotiating the Business Terms of the Purchase
While you are conducting due diligence on the business you intend to buy, you should begin negotiating the terms and conditions of the purchase of the business. This high level “term sheet” outline, would sufficiently detail (without necessarily including all the legalese), some of the following items, among others:
The parties to the business transaction;
Is the transaction to be structured as a stock purchase (buying all of the assets and liabilities of the business) or only purchasing certain assets of the small business (real estate, accounts, intellectual property, among other assets);
The purchase price and what assets or stock is being purchased;
The timing of the payment of the purchase price (lump sum or in installments);
If payment is installments, the amount of the down payment and the interest rate, and the collateral securing the note (also consider conditions to repayment (e.g., only from profits);
Binding and non-binding terms; and
Confidentiality obligations.
The “term sheet” (also known as a “LOI,” “letter of intent,” “MOU,” or a “memorandum of understanding”), which could be as short as a page or two, should expressly state that certain obligations are non-binding on the parties. You may want to state that either party could walk away from the deal if they change their mind (maybe after a no-shop period), but you might want to make certain terms binding like reimbursement and confidentiality obligations. As that the stock purchase agreement or asset purchase agreement will be drafted from the term sheet, you need to be as specific as possible with respect to contingencies to closing, offsets to the purchase price and other obligations (it will be hard to convince the seller to agree to terms in the resulting agreement differing from the deal points already agreed upon in a term sheet).
You should consult a business attorney at some point during the drafting of the term sheet (even if the first draft of the term sheet is prepared by the business person, you should have your business attorney review and/or negotiate it before it is signed). Please see my post “Negotiating the Terms of the Deal — Buying or Selling a Small Business In New York” for a more detailed discussion about putting together a term sheet.
3. Conducting Due Diligence
Due diligence is the process of thoroughly investigating the business being acquired. The outcome of your business due diligence may very well impact the price you are paying and other terms and conditions of the term sheet. You will want to have your financial advisor review prior years’ tax returns and financial reports. You should have your business lawyer review all major contracts (including leases) to see if there are any “atomic bombs” that may be triggered by the sale of the business or that have any surprise obligations or rights (balloon payments, rights of first refusals, right to terminate, rights of consent, etc.). If the business owns or leases real estate you want to review all documentation, leases, surveys, and environmental reports (or order one if there is a possibility that the business in question (or its predecessors) might have contaminated the land. Read “How to Conduct Due Diligence for a Merger or Purchase of a Business“, for more details and a checklist of some due diligence items that should be reviewed by you and your corporate attorney.
4. Preparing the Proper Documentation for the Business Purchase
There are many documents needed when transferring a business: the stock purchase agreement or asset purchase agreement, assignment and assumption agreements, deeds, consents, tax filings, among others. You should consult a New York business attorney to negotiate, draft and/or review these instrumental agreements and documents which are necessary to transfer the business.
The most important document in a business sale is the “purchase agreement” (also known as the “sales agreement” or “acquisition agreement”) — and will be in the form of a stock purchase or asset purchase. To protect yourself as the buyer, your attorney should prepare the first draft of this document. Otherwise, if the seller’s attorney prepares the sales agreement it can be one-sided, or worse yet, if the attorney is not too experienced, it might not cover the terms and conditions to the business sale that properly encompasses the complexity of the business or transaction.
Once the purchase agreement has been finalized, your business attorney can prepare the “closing checklist” of all of the consents, documents, filings, and agreements that need to be prepared and executed, and a list of all contingencies that need to occur on or before the “closing.”
5. The Closing of the Business Purchase
Generally, the closing consummates the transaction (unless of course, there are post closing obligations to occur). At the closing the parties and their corporate attorneys get together to exchange money and property, sign documents, and handle the remaining paperwork.
If you are considering a buying a small business in New York, make sure to check with your accountant and/or tax adviser and a New York Business Lawyer. There may be important tax and other legal consequences to consider before making the decision.
Negotiating the Terms of the Deal — Buying or Selling an LLC or Small Business In New York
Mar 28th
After you have found your target New York business to acquire, you (and/or your corporate attorney) have to negotiate the terms of the business purchase transaction. In this article I will outline some of the typical terms of a term sheet for the purchase of a small business and some of the things you need to consider.
As I mentioned in “Buying a Small Business in New York”, you need to put together a “term sheet” (also known as a “LOI,” “letter of intent,” “MOU,” or a “memorandum of understanding”). This can be done as you and your corporate attorney are conducting your due diligence on the target business.
The term sheet should consist of the broad basic terms of the deal. As that the stock purchase agreement or asset purchase agreement will be drafted from the term sheet, you need to be as specific as possible with respect to contingencies to closing, offsets to the purchase price and other obligations (it will be hard to convince the seller to agree to terms in the resulting agreement differing from the deal points already agreed upon in a term sheet). The term sheet, will set forth the parties’ mutual understanding of the terms of the small business purchase.
Having a term sheet serves purposes in addition to acting as the blue print of the business deal from which to draft the stock purchase agreement or asset purchase agreement.
The business purchase term sheet communicates to the seller that you are serious about purchasing the small business. Depending on how the term sheet is drafted, while you may have an “out” to walk away from the business acquisition, it shows that you are committed to culminate the purchase;
It can lock the seller into looking for other purchasers of the small business; and
The term sheet helps flesh out the major issues that often arise in a business purchase and sale, so to avoid surprise roadblocks that may pop up along the way to closing;
Here is a list of typical terms and other issues to be addressed in a term sheet to buy a business:
1. The Names and Contact Information for all parties that are involved in the purchase transaction — buyer, seller, buyer’s corporate attorney, seller’s company attorney, names of any business brokers involved in the deal, and the names of the financial advisors and/or accountants. If any of the parties are not individuals, you should have the full entity’s legal information (including state of incorporation, officer’s names and contact information, etc.)
2. Purchase Price and Other Consideration – Will this be a cash deal, or a combination of cash and other real or personal property, stock, or intellectual property?
3. Payment Terms. If a cash deal, will it be paid in a lump sum, or paid in installments? If in installments, will it be tied to profitability, or other contingencies? If seller financed, at what interest rate and term? If financed by a third party, is the deal contingent on obtaining that financing? Will there be a downpayment?
4. Collateral (or security) for the Purchase Price. If the business is being sold with seller financing, the seller may want collateral for your promise to pay back the loan. Perhaps the security interest pledged will be the stock of the company, some or all of the business property or business assets, or some other real or personal property that you own. Of course, if you fail to make the financing payments, the seller will want to then be able to foreclose or repossess the collateral that is being pledged against the seller financing.
5. Structure of the Deal. Will it be an Asset Purchase or Stock Purchase?
Assuming that the business target is a corporation or limited liability company (LLC), you can structure the purchase in one of two ways — either it will be a stock purchase or an asset purchase. There are advantages to both, and both may have significant tax implications. You should structure the transaction after obtaining advise from your financial advisor or accountant.
From a legal perspective a stock sale is quite different from an asset sale. In a stock sale transaction, you are buying all of the stock of the company — so the company’s assets, liabilities, goodwill, contracts, intellectual property, real property stays with the company (assuming that there are no prohibitions of or conditions to transfer contained in any of of the documents relating to same). In a stock purchase, you are buying the company entity “lock, stock and barrel.” That also means you may be buying the company’s headaches as well (like lawsuits, and other contractual obligations). So when you buy the stock of the company, you and your corporate attorney should conduct intensive due diligence into the business’ history, contracts, minute books, financial reports and records.
In an asset purchase, you are cherry-picking and buying the plum assets that you need for your own business (or even a division of the seller’s business). In an asset sale (or asset purchase) the company’s liabilities and other headaches stay with the seller. You can buy all or substantially all of the assets of a business in New York, with little risk that you will be held responsible for the debts and obligations of the business incurred prior to the purchase of the business by you.
6. Transfer Issues. Whether the business is being sold as a stock sale or as an asset sale, you have to be concerned about whether there are restrictions to transferring the assets of the business. When conducting due diligence, you (with the help of your corporate attorney) should determine which assets may need prior consent for the transfer (like business space leases, major contracts with customers or vendors, or bank loans or credit agreements). Depending on how the restriction is worded in the respective contract, a mere transfer of any stock or a controlling interest of the ownership of the business stock, may trigger the obligation to obtain consent.
7. Covenant not to Compete. Generally, how successful the the business you are buying was in the past was a result of the management and ownership of the business. So you might want to consider keeping those employees on after you buy the business for continuity purposes and have them enter into employment agreements or consulting agreements with you. Of course, if you have the expertise to run the business from day 1, then you may want to “buy” the benefit of having the prior management and prior business owners from competing with your newly purchased business. You would want to enter into an agreement with covenants not to compete (sometimes referred to as a “non-compete agreement” or “forfeiture for competition agreement”), to prevent the sellers from immediately soliciting their old customers or competing with you. Under New York law, covenants not to compete (or “non-compete agreement” or “forfeiture for competition agreement”) are valid as long as they are reasonable in duration and scope.
8. Non-binding Nature of the Term Sheet. As I discussed in “Buying a Small Business in New York”, you should consider having a “non-binding” term sheet (e.g., there should be contingencies when you can walk away from the deal without liability). But note, the term sheet should be drafted properly so that certain provisions of the term sheet should be binding, like the provisions regarding limitation of liability and confidentiality, among others (you don’t want the seller to sue you nor disclose your confidential information like financial information).
9. Post-Closing Seller Obligations or Buyer Obligations that Continue after the Sale of the Business. As discussed above, there might be times that you want the seller to continue to provide consulting services to the business after the sale of the business. Maybe you decided to close the deal before all of the non-material consents were obtained or prior to when the applicable taxed needed to be prepared and filed. Any post-closing obligation that need to be written in the stock purchase agreement or asset purchase agreement should be included in the term sheet.
Which is Better – An Asset Purchase or a Stock Purchase of a Company? From first impressions, you might think an asset purchase is more advantageous. Generally, buyers prefer an asset purchase for reasons of tax deductibility and cherry-picking the favorite assets (without being saddled with the liabilities). However, in a stock purchase you can buy the business as a going concern with minimal interference of the business (and sellers prefer to sell the entire business with all its blemishes and liabilities). Of course, the bottom line will be price (an asset purchase will probably be more expensive than buying the stock of a company).
If you are considering a buying a small business in New York, make sure to check with your accountant and/or tax adviser and a New York Business Lawyer. There may be important tax and other legal consequences to consider before making the decision.
Your Company Should Have a Nondisclosure Agreement (Confidentiality Agreement) with its Employees
Mar 22nd
A Non-Disclosure Agreement (also known as an NDA or confidentiality agreement) is meant to protect a business from its employees misusing valuable proprietary information. Often it is a good idea to have a confidentiality agreement in place with each of your employees (regardless of position). For instance, your receptionist and salesperson might have access to your customer lists, which your company would deem confidential.
You should not use a “form” NDA that you download from the internet or obtained from another business. Your NDA should be customized for the facts and opportunity at hand and more importantly, for your particular business. It is important to keep in mind that your company’s confidentiality which is designed for the purpose of a “business-to-business” transaction (where both corporate parties disclose confidential information to each other) won’t suffice for the employer-employee relationship. You should consult a New York Business Lawyer (or corporate attorney) to prepare your company’s employee confidentiality agreement.
Your employee non-disclosure agreement should be specific as to what is considered “confidential information” and also include things that the employee ought to reasonably know is confidential. You should also include company trade secrets (see “When Do You Need a Nondisclosure Agreement (NDA)?” for more discussion about Trade Secrets).
Your corporate attorney should set forth for what purposes the employee can use the confidential information and how he or she can use the confidential information (may not be removed from the offices, no reverse engineering, no copying, etc.). Of course, you need to have provisions specifying what the employee must do with the confidential information when his or her employment ends.
Your company lawyer needs to add “teeth” to the NDA stating that employee indemnifies the company for any breach and that the company may resort to any remedy at law or in equity to enforce its rights in the proprietary information (this means the employee could be sued for monetary damages as well as enjoined from using the information).
Of course, depending on what your business does, an employee confidentiality agreement may be part of a more encompassing agreement that includes provisions limiting the competitive activities of an employee when he or she leaves your company (sometimes referred to as a “non-compete agreement” or “forfeiture for competition agreement”) and requiring the employee to disclose prior inventions (and promise to either not include the prior invention in what they create for your company and/or grant your company a royalty free license to otherwise use the prior inventions).
Lastly, like protecting trade secrets, it is not enough to merely have non-disclosure agreements (confidentiality agreements) in place — your company needs to implement policies and procedures to maintain the secrecy of your company’s confidential information.
I recommend that you consult with a New York Business Lawyer to prepare your company’s employee confidentiality agreement, “non-compete agreement” or “forfeiture for competition agreement” to help ensure the best ways to protect your company’s confidential information and competitive edge.
When Do You Need a Nondisclosure Agreement (NDA)?
Mar 21st
