A transaction of purchase and sale of business

Feb, 03 2021

Future entrepreneurs resort to two options: registration of business in accordance with the provisions of law, or a transaction of purchase and sale of business that is stable in the market. Both options have advantages and disadvantages, the choice is up to the buyer. Transactions for the purchase and sale of business have the following specifics:

  • legal technologies are being combined, where transfer of property rights to the new owner takes place;
  • an agreement signed in accordance with law is an informal process of transferring company’s management rights from hand to hand. 

It is easier to buy a ready-made project, sign a contract for the sale in accordance with law, and work in a given direction.

What is the business being sold?

In business practice, the concept of “ready-made business” is an established term. 

A “ready-made business” has a value that includes the sum of assets (tangible and intangible). The assets are united by organizational processes that operate in a separate company, representing the structure of supply and sales, the existing base of customers and contractors, the company’s personnel, brands, patents, technologies, licenses, etc.

Entrepreneurs most often buy a working enterprise if they already own a company. Thus, own business is expanding, new areas of work are being developed. An alternative option for many entrepreneurs is acquisition of franchise of a large enterprise, if such an opportunity is provided, however, there may be difficulties associated with the terms of use of a well-known brand.

Advantages of entering into a deal

Purchase and sale of business in a ready-made form includes the following advantages:

  • saving time on registering a new legal entity;
  • reduction of entrepreneur’s expenses on equipment, recruitment of personnel.

In fact, the new owner of legal entity receives the following advantages:

  • Working staff;
  • Equipment;
  • Database of partners and counterparties;
  • Well-established production;
  • Licenses (if a permit is required by law for the type of activity).

The advantages of acquiring a company that operates in the market force entrepreneurs to apply for this service. The business purchase and sale transaction must be carried out in strict accordance with the law: otherwise, the agreement between the participants is declared invalid with all legal consequences that follow.

The process of preparing transaction documentation

The process of entering into an agreement between the buyer and the seller will be identical in both cases: when buying an existing business or when acquiring a business that exists only on paper. The difference is only in the performance indicators: they will be zero in the absence of real activity, or with clearly defined figures based on the results of financial accounting statements.

Preparation stages, as follows:

  • Carrying out due diligence of the business planned for acquisition. 
  • Obtaining approval of interested parties (shareholders, founders).
  • Registration of transfer certificates.
  • Drawing up an agreement of intent.

Most often, before the main, the participants draw up a preliminary agreement. This document is used in business practice. This agreement provides the parties with an opportunity to reach agreement on fundamental issues related to the transfer of economic activities. Among the important points that are agreed by the participants, you can identify:

  • purchase price;
  • payment method: one-time, in advance, by installments, through credit, etc.;
  • wishes of the old owner regarding the enterprise being sold by him: for example, clauses on not dismissing employees, the obligation of the new owner to protect their rights, etc.;
  • transfer of powers from the seller to the buyer under the existing commercial contracts of the former owner with these counterparties.

Important aspects of concluding contracts with LLC

The contract with LLC must reflect the mandatory clauses, which include the following:

  1. Price: the cost of the share being sold to a third party may not be less than that specified in the offer agreement addressed to the participants of LLC. If there is no price clause in the agreement, there is a risk that the founders of LLC may challenge the price set by the seller. This carries additional risks for the buyer associated with the time spent on clarifying these issues. 
  2. Algorithm of payment, form of payment.
  3. Notary expenses.
  4. Liability of the parties if the obligations under the contract are violated. 
  5. Guarantees, assurances of the seller that the company is not listed as a debtor for taxes and fees.

In addition, guarantees and assurances received from the seller about the presence of his property, absence of claims on it from third parties are also important. That is, the buyer must be sure that the seller has property that no one has the right to claim. And this legal fact is fixed by provisions of contract. If the seller violates the Civil Code of the Russian Federation – providing the second party with incorrect information, the buyer can claim damages and penalties. Additional conditions may be specified in the contract at the request of the parties. 

After conclusion of contract that fully complies with legal norms, the parties must proceed to the transfer of funds. One of the options that is often used in practice is transfer of money through a bank safe deposit box. The seller receives money in a banking institution when he brings a document confirming transfer of ownership of property.

Legal assistance in preparation of documents

Buyers take on certain risks if they decide to purchase a ready-made company. The business needs to be checked before signing a contract in any case. 

Lawyers are often involved to support transactions. In particular, experts help to:

  • determine the legal status of the alienated company;
  • check the constituent documentation, acts of internal content;
  • determine the solvency of each of the participants;
  • consider the buyer’s risks that may arise when purchasing a finished project;
  • check the presence of enforcement proceedings on the debts of the sold company;
  • determine whether the company has arrears on mandatory fees to extra-budgetary funds;
  • make an analysis of the company’s financial statements.

Many entrepreneurs often lack not only time, but also legal knowledge to conduct the sale, purchase of ready-made company. Applying for legal aid is the best way out of the situation.

Author of the article

A transaction of purchase and sale of business
Ignat Shevchenko
Lawyer

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