Cream of the Crop 1/Cream of the Crop 1.iso/BUSINESS/SBA62.ARJ/FSBA.EXE/F220.SBE

Text File | 1992-04-30 | 10KB | 172 lines

@141 CHAP 3
           ┌───────────────────────────────────────────────┐
           │    CLOSING THE DEAL -- TAX CLEARANCES AND     │
           │    OTHER LEGAL REQUIREMENTS ON BUYOUTS:       │
           └───────────────────────────────────────────────┘

            "If it's important, always get it in writing up
             front. Your own mother will cheat you blind if
             you don't." -- Jenkins' Tenth Law of Business
             Survival


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 mini-
mum, 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
most 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 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.

    3. Check for recorded security interests or liens.  Before clos-
ing 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 in-
volves 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 certi-
fications 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 corpor-
ation 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 contam-
inated 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 vast 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 acquir-
ing 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 bakeries, restaurants, garages, cleaning
      and dyeing establishments, retail or wholesale merchants, and
      certain other kinds of businesses, the buyer must prepare a
      "Notice to Creditors of Bulk Transfer" and file it at least 12
      days before the sale with the county recorder in the county
      where the business is located.  Notice must also be published
      in a general circulation newspaper in the judicial district
      where the property is located and in the judicial district
      where the seller's main California office is located, also 12
      days before the transfer, under the California Commercial Code.

   .  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 certif-
      icate 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, un-
      like 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 pro-
      perty 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.