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Frequently Asked Questions
 
Buying and Selling Businesses 101 
Legal Links<tm>: Chain 1, Link 3A
Written by Gregg R. Zegarelli, Esq.
 


Table of Contents

  1. What is a letter of intent and should I use one?
  2. What is the difference between a "stock" deal and an "asset" deal?
  3. Any general additional pointers?
  4. Do I need an attorney?

What is a letter of intent and should I use one?

There are two types of letters of intent: binding and non-binding.  BE CAREFUL, you need to know which one is best for you.

A binding letter of intent is a contract.  It may look informal, but it is a contract.  It could simply be a coverletter.

A non-binding letter of intent is used to focus discussions.  Often non-binding letters of intent are used prior to having attorneys draft the "real" agreement, also often called the "definitive agreement."  Without a letter of intent in this context, business people would spend a lot of money having attorneys draft and redraft contractual documents, even though the business people have not even gotten close to a deal.  However, a non-binding letter of intent should clearly indicate that it is non-binding.

Sometimes letters of intent are entitled "Letter of Intent," "LOI," "Memorandum of Understanding," "MOU" or "Term Sheet."

You need to really analyze whether you need a letter of intent at all.  Possibly, you are able to go directly to preparation of a definitive agreement, and, if so, that is generally preferred.  If you need a letter of intent--usually because the deal is complex or the parties don't have comfort as to the terms being discussed--then you need to think about whether you are better off "locking down" an unclear deal with a binding letter, or merely focusing discussions with a non-binding letter.  Binding letters of intent are usually discouraged by attorneys, because they are legally risky: you're agreeing to be bound to a document that is, on its face, somewhat vague or incomplete of details.  In our experience, the only time binding letters are used is when a business client understands the legal risks but the reward of locking down the deal is a better business decision.  Attorneys tend to prefer a non-binding letter of intent or proceeding directly to the definitive agreement.

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What is the difference between a "stock" deal and an "asset" deal?

A lot.  For certain entities, such as corporations, you can purchase a business by buying the stock of the business or the assets of the business.

If you buy the stock in the corporation, then you "step into the shoes" of the shareholders of the seller.  That is, as a question of organic corporate law, you take the corporation "as is."  If there are claims against the corporation, if the assets are fully depreciated, if the corporation has a high unemployment compensation factor, etc., you take the corporation as it is.  If there is a problem, you may have a claim against the selling shareholders for a breach of their representations to you, but you are the owner of the corporation.

If you buy the assets of the company, you can form a brand new corporation, then "pour" the purchased assets into the new company.  In this manner, you are merely a buyer of property.  You may be able to depreciate the property, you obtain new insurance facts and, because the company is brand new, you know that there are no claims against it.

Stock deals can make sense, you just need to know exactly why you need to structure the deal as a stock deal.  In many cases, sellers prefer stock deals and buyers prefer asset deals.

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Any additional pointers?

  • Perform computerized trademark and service mark research to ensure that business names, product names, and logos thereof, are able to be federally registered marks. Obtaining a corporate or fictitious name registration with a state does not imply that the mark is available for a federal registration.
     
  • Perform lien searches to assist with a determination as to whether the assets are free and clear.

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Do I need an attorney?

The issues addressed in this document are legally complex, and the purpose of this article is merely to introduce you to a number of legal issues. You will need to retain an attorney to assist you with your specific requirements.  Generally, at the cost of hiring an attorney, you know that you have professional assistance with protecting your interests. 

Properly structuring a transaction requires an understanding of the logistics, the industry, and the legal options available to foster consummation of the transaction.

If you do not have legal representation, then contact us.  If you have legal counsel, with whom you are currently satisfied for your general legal representation, then suggest our services to assist as special counsel for business-related issues.  Our firm offers a number of pricing and payment opportunities, including retainer-based discounts that may provide a significant savings for you.

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