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Text File | 1996-11-06 | 12KB | 242 lines

@141 CHAP 3

        ┌───────────────────────────────────────────────┐
        │    CLOSING THE DEAL -- TAX CLEARANCES AND     │
        │    OTHER LEGAL REQUIREMENTS ON BUY OUTS:      │
        └───────────────────────────────────────────────┘

The legal procedures involved in buying an existing business
can be quite complex.  Even if you are the most self-reliant
do-it-yourselfer, you should, in this particular situation,
be sure to seek out the services of a competent business
attorney to represent you.  In order to ensure that you are
protected under the law as fully as possible from liabilities
you have not agreed to assume, you should, at a minimum, have
your attorney take care of the following items in connection
with the purchase:

    1. Review the structuring of the deal, including the
actual sale agreement documents.  (If your attorney is not
a tax specialist, it would also be wise to have a tax
accountant review the terms of the agreement and advise you
on possible ways to structure it better for tax purposes.)

    2. Comply with the local Bulk Sale or Bulk Transfer
Act.  In some states, the buyer of a retail or wholesale
establishment or certain other types of businesses must
prepare a "Notice to Creditors of Bulk Transfer" and,
usually, file it in counties where the business operates
and, in some states, also publish it in a general circulation
newspaper prior to the purchase of the business.  If this is
not properly done, the seller's unsecured creditors may be
able to "attach" the property that you thought you were
buying free and clear.
@CODE: AL AZ

Other states require that:

  . The seller must furnish you with a list of the names
    and addresses of all his or her creditors and those
    claiming to be creditors.

  . You and the seller must prepare a list of all items
    of property to be transferred.

  . You must notify each creditor in advance of the
    planned transfer, in person or by certified mail.

  . You must keep the property list on file and make it
    available to the public for at least 6 months.

@STATE has adopted this latter set of requirements,
as set forth in the Uniform Commercial Code.
@CODE:OF
@CODE: AK AR CO CT FL ID IL IA KS KY LA ME MN MS MT NB NV NH NM ND OR PA SD TX VT WA WV WY

NOTE:  The bulk sales laws are now generally considered
to be a 19th century anachronism, an unnecessary burden
on buyers of businesses, and of very limited benefit to
creditors or anyone else.  Thus, since 1988, many states
have repealed their bulk sale laws entirely, including
@STATE.
@CODE:OF

    3. Check for recorded security interests or liens.
Before closing the purchase, your attorney should check
with the appropriate state office (usually the Secretary of
State) to determine whether anyone has recorded a "security
interest" (a lien or chattel mortgage) against the personal
property of the seller's business. For a fee, the Secretary
of State's office will generally provide a listing of any
security interests that have been recorded as a lien against
the assets of the business you are buying.  Also, if the
transaction involves a purchase of real property, you will
also have to have a title search performed to see if the
seller has good title and if there are any recorded mortgages
or other claims against the property that the seller has
failed to disclose to you.

    4. Check on various state tax releases, including state
employment taxes, sales and use taxes, and, if you are
acquiring an incorporated business, you may also need to
obtain tax releases for corporate income or franchise taxes,
as well.  Most states require you, as buyer of an ongoing
business, to obtain one or more such tax releases, certifying
that no delinquent taxes (of the various kinds indicated)
are owed to the state by the seller.  Otherwise, if you
fail to withhold any such taxes owed by the seller from
the purchase price, the state will be able to look to YOU
for payment of such taxes, and you will have to try to get
indemnity from the seller, who may by then be in Brazil
or relaxing on the Riviera, enjoying your money.  Your
agreement of sale should, therefore, be conditioned on the
seller first obtaining certifications or releases from all
appropriate taxing agencies showing that the seller is not
in arrears on any kind of taxes.

    5. Review the terms of any important contracts, such as
leases, that the seller is assigning to you, to make sure
that such assignment is possible under the terms of such
contracts, without any detriment to you.  Similarly, if you
are acquiring a business in certain kinds of regulated
industries, particularly relating to food, health, or liquor
sales, make sure that proper legal steps are taken to transfer
any federal, state or local licenses to you--otherwise, you
may not be able to operate the business you have bought!

    6. Look for environmental problems, and ways to protect
you from them.  If the deal involves acquisition of real
estate, or of a corporation that previously owned real estate
during its history, be aware that you may be subjecting
yourself to virtually unlimited liability, far beyond the
value of the property, if the the property is contaminated
by hazardous waste substances, under the federal Superfund
legislation.  Thus, have your attorney include appropriate
indemnity provisions in the agreement, in case such problems
come to light after the purchase.  However, this is only a
partial protection, since being entitled to indemnity and
actually collecting it are two different things, as the
seller may be long gone or broke by the time the EPA jumps
down your throat, requiring you to spend astronomical sums
to clean up the toxic waste on the site.  Thus, you should
also have an environmental consultant do soil samples or
other testing to attempt to determine if such contamination
exists; or, in some cases, you should even insist upon having
an "environmental audit" done before the transaction is
consummated.  In either case, you are much less likely to
be held liable if a hazardous waste problem later shows up,
if you can show you did "due diligence" (hiring experts,
etc.) before acquiring the property, and that no problem
was evident to experts at the time.

Finally, note that in most states, you have only 90 days
or so after acquiring an ongoing business to apply for the
right to succeed to the seller's unemployment tax experience
rating, if you desire to do so.  If the seller had a low
experience rating, this may save you quite a bit in state
unemployment taxes, since you will be able to "inherit" the
seller's lower tax rate, as a "successor employer," rather
than pay the regular unemployment tax rate that applies to
a new employer.  Be sure that you don't miss the deadline
for making any required election to adopt the seller's
experience rating.

@CODE: CA
@CODE:NF

     ┌─────────────────────────────────────────────────────┐
     │CALIFORNIA LEGAL REQUIREMENTS--PURCHASE OF A BUSINESS│
     └─────────────────────────────────────────────────────┘

State law requirements that your attorney needs to see to
if you are acquiring a business in California include the
following:

   .  BULK SALE LAW.  For many types of business that sell
      from stock, a sale of personal property (inventory,
      equipment) in other than the ordinary course of
      business, either by auction or conducted by a
      professional liquidator, or constituting over half
      of such seller's assets of that type, may be considered
      a "bulk sale" under California law.  If so, you, as
      the buyer, must prepare a notice to creditors of the
      bulk transfer and file it at least 12 days before the
      sale with the county recorder in the appropriate
      county or counties.  The notice must also be published
      in a general circulation newspaper in the judicial
      district where the property is located and in the
      judicial district in which the seller's main California
      office is located, also 12 days before the transfer,
      under the California Commercial Code.  Notice must
      also be given to county tax assessors in all affected
      counties, and may need to be accompanied by a final
      personal property tax return if filing between March 1
      and the last Friday in May. Other, special requirements
      may also apply to certain bulk sales of not more than
      $2 million, where substantially all the consideration
      is in the form of cash or a promise to pay cash.  Bulk
      sale law requirements are very complex and technical,
      so consult a business attorney to determine whether the
      bulk sale law applies, and, if so, what you must do to
      comply with it, in order to protect yourself against
      creditors of the seller who don't get paid and who may
      come after you if you fail to dot the "i's" and cross
      the "t's."

   .  RECORDED SECURITY INTERESTS.  Check for the existence
      of any recorded security interests on personal property
      of the seller's business with the Secretary of State's
      office in Sacramento.

   .  EMPLOYMENT TAX RELEASE.  You should require that the
      seller of the business obtain a "Certificate of
      Release of Buyer" (Form DE 2220) from the California
      Employment Development Department certifying that
      all employment taxes have been paid by the seller.

   .  SALES TAX RELEASE.  Similarly, you should require
      that the seller obtain a "Certificate of No Tax Due"
      from the state Board of Equalization, verifying that
      all California sales and use tax payments have been
      made by the seller.

   .  FRANCHISE TAX CLEARANCE.  If you are acquiring a
      corporation, require the seller corporation to obtain
      a tax clearance certificate from the Franchise Tax
      Board, certifying that all state of California
      franchise taxes have been paid by the corporation.

   .  ALLOCATE SALES PRICE TO MINIMIZE SALES TAX.  In
      California, unlike most states, much of the purchase
      price of acquiring the assets of a business is
      typically subject to sales tax to the extent that
      the sale includes tangible assets such as furniture,
      equipment or machinery (but inventory will usually
      be exempt, if it is purchased for resale).  Thus,
      you and the seller may be able to reduce the sales
      tax on the transaction by allocating (within reason)
      more of the purchase price to inventory (or to real
      property or intangible property) and less to equipment
      and machinery, in your agreement of sale.

   .  EXPERIENCE RATING.  Check to see if the seller's
      experience-based unemployment tax rate is less than
      the new employer rate of 3.4%.  If it is, you will
      want to file E.D.D. Form DE4453 within 90 days after
      the business changes hands, in order to succeed to
      the seller's unemployment tax reserve account (and
      tax rate).

   .  REPORT CHANGE OF OWNERSHIP OF REAL ESTATE.  If you
      are purchasing a business that owns real property in
      California, you must report the change of ownership
      to the county tax assessor on a timely basis.  Note
      that this will trigger a reassessment of the property
      at its current value, rather than the usually much
      lower "Proposition 13" value on which the seller's
      property tax was based.  Thus, you will pay much more
      real property tax than the seller did on the same
      property, in most cases.