Guidelines for structuring and preparing for a successful business succession transaction.

1. Structuring and Preparing for a
Business Succession Transaction
Mark E. Rinehart
Callister Nebeker & McCullough
November 5, 2014

2. Two Ways to Sell a Business
• Sale of Stock or Membership Interest
• Sale of Assets

3. Team Effort
• Substantial commitment of owner’s time
• Accountant
• Lawyer
• Financial advisor
• Estate planner
• Business broker/Investment Banker
• Buyer’s lender or financing source

4. Sale of Stock or Membership Interests
• “Sells the company”
• Leaves the company intact
• Capital gain to the owner
• Buyer gets a stepped up tax basis in the stock
or membership interest equal to the purchase
price
• But doesn’t automatically get the same basis
in the assets of the company unless tax
elections are made

5. Inside and Outside Basis Elections
• For a sale of stock of a corporation, 338(h)(10)
election
• Deemed liquidation followed by a sale of
assets
• Usually favorable for the buyer, unfavorable
for the seller, because of double taxation
• For an LLC, 754 election
• Favorable for buyer, no effect on seller

6. Documentation of a Stock or
Membership Interest Sale
• Stock or membership interest purchase and sale
agreement
• Bill of sale
• Seller makes representations and warranties about
ownership of the company and/or the assets
• Promissory note, guaranties, security agreement
• Documentation of transfer relatively easy because of
the nature of the asset being sold (watch out for
change of control provisions in contracts)
• Endorse stock or membership interest certificates
• Entries on ownership transfer ledger

7. Documentation of an Asset Sale
• Asset purchase agreement and a bill of sale
• Seller makes representations and warranties
about the assets of the business
• Promissory note, guaranties, security
agreement
• Documents of transfer can be complicated
because of the nature of the assets being sold

8. Documentation Issues Involved in an
Asset Sale
• Assets have to be assigned
• Different assets assigned in different ways
• Tangible assets assigned by bill of sale (list of
assets required, plus a “mother hubbard” bill of
sale to cover assets not listed)
• Intellectual property assets assigned by a bill of
sale or assignment, together with change of
ownership documents filed with the PTO
• Contracts assigned (consent to assignment issues,
list of contracts required, review each one for
anti-assignment clauses)

9. Some Assets Can’t be Assigned or
Require Consent to Assignment
• Insurance policies
• Title insurance policies
• Promissory notes?
• Legal opinions
• Licenses
• Government Permits
• Leases
• Contracts

10. Preparation for an Ownership Interest
Sale
• “Clean up” the entity ownership records
– Ownership transfer ledger
– Create or replace stock or LLC ownership
certificates
• Good standing? State filings up to date
• Sales and property taxes paid in full
• Certificates of incorporation or organization

11. Preparation for an Ownership Interest
Sale (continued)
• Certificate of incorporation or organization
• Bylaws or operating agreement
• Federal and state income tax returns filed
• List of creditors and liens on assets
• Payoff of current creditors, prepayment
penalties?
• Terminate out of date UCC-1 financing
statements
• Financial statements up to date with reserves for
A/R, deferred compensation, etc.

12. Find the Buyer
• Same industry
• Competitor
• Private equity fund
• ESOP
• Business broker/Investment banker

13. Initial Documents
• Confidentiality and Non-disclosure Agreement
• Letter of Intent

14. Confidentiality and Nondisclosure
Agreement
• Should be mutual
• Should provide for return of information if no
closing
• Should permit disclosures required by law or
for the transaction to proceed, despite
confideniality
• Shopper concern

15. Letter of Intent
• Should specify whether it is binding or nonbinding
• Typically both in different sections of the letter
• Binding portion covers exclusivity, earnest money,
access during due diligence, length of due diligence
period, return of information if no closing, drop dead
date, obligations that survive termination
• Nonbinding portion covers terms of the deal (price,
identity of the buyer, cash and note, guarantors,
security for note, describe reps and warranties,
conditions to closing, closing date)
• Duty of good faith and fair dealing even for a
nonbinding letter of intent

16. Most Important Deal Points in Selling a
Business
• Purchase Price
• All cash, or cash plus a note (seller carryback)
• If a note is involved, who are the guarantors, what is
security for the note and possible subordination of the note
• Will the seller remain as an employee or consultant
(employment agreement if so)
• Reps and warranties in the purchase and sale agreement
• Hiring and firing seller’s employees
• WARN Act concern
• Antitrust concern – Hart Scott Rodino Filing

17. Most Important Deal Points in Selling a
Business (continued)
• Earnout?
• Seller equity in the buyer?
• Confidentiality of deal for seller’s employees,
especially during due diligence
• Conditions to closing, financing contingencies,
describe satisfactory due diligence
• Allocation of purchase price (goodwill v.
depreciable assets, capital gain v. ordinary
income)

18. Closing
• Not as simple as it sounds (takes time)
• Beware the reopener strategy
• Be prepared to solve last minute problems
• Third party issues are the most likely to delay
or blow up the deal
• Closing book after closing

19. Post Closing
• Closing book
• Tax returns and allocation of purchase price
• Record liens on real property assets
• File UCC-1 Financing statement for personal
property assets
• Dissolve seller if an entity?
• Estate and Asset Protection Planning