Legal Tips If Your Business is in a Buyout
Some things New Jersey entrepreneurs need to know
on September 13, 2018
Updated on March 9, 2021
For many entrepreneurs, the most exciting phase of business is the startup. But as any business grows and matures, there will inevitably come a point where the original owner or owners want to move on. Ideally, the business will already have written agreements or procedures in place to handle a buyout.
“If the people running the business can think ahead … they put right in there, how it’s done,” says Thomas Loikith, an attorney at Harwood Lloyd in Hackensack. “If you have it spelled out, it minimizes the possibility for disputes as to how business interests are going to be valued. It’s better if the parties, upfront, agree…”
While every business and ownership situation is unique, here are some general tips to consider when planning for a potential buyout:
1. Review the existing governing documents
As mentioned above, the best-case scenario for most businesses is to anticipate the possibility of a buyout in advance. In a New Jersey LLC, for example, the members should have executed an operating agreement when the company was formed. A well-drafted operating agreement includes provisions to deal with the death, resignation or buyout of a member’s interest in the business. The agreement should clearly state the conditions that can trigger a buyout, how a price should be determined and who is eligible to purchase the interest.
2. Get an outside appraisal of the business
When you buy or sell a house, you typically get an appraisal to determine whether or not the sales price accurately reflects the local market. The same should be true of a business sale or purchase. The parties should agree on an outside consultant to conduct an impartial valuation of the business. If for some reason the parties cannot agree on a single appraiser, they should still each hire their own consultant so they have a better idea of where things stand while they negotiate a final price.
3. Consider all options with respect to financing
Every buyout will not be a simple cash deal. Particularly when small businesses are involved, buyers and sellers may need to consider more “creative” financing options. You also need to carefully consider what New Jersey law permits with respect to selling or restructuring a business.
4. Hire an experienced New Jersey business attorney
Buying a business is not like purchasing a used bicycle on Craigslist. It is a complex transaction with a number of legal and financial ramifications for all parties involved. This is why working with a qualified New Jersey business attorney is essential, especially if something goes wrong and it becomes necessary to modify or unwind the deal.
Loikith recommends working with an attorney from the day you originally start the business. “If you get to the point where people are talking about valuing businesses after the fact,” he notes, “maybe you should be talking to a litigator.”
5. Make sure everything is in writing
Again, a business buyout is not the place to rely on a “handshake” deal. There must always be properly executed written agreements to ensure the purchaser and seller understands their rights and responsibilities. Getting it in writing is not a matter of creating busywork for the lawyers. It’s about ensuring there is no ambiguity in the final agreement, allowing the business to successfully continue once the sale is complete.
For more information on this area, see our overview of mergers and acquisitions.