Legal Issues Relating to the Sale of Businesses and Professional Practices

Kennebunk_Professional_Building38925.jpgOur firm is often asked by clients to handle the purchase or sale of an ongoing business. This business may also be a professional practice, such as a pharmacy, or medical or dental office. There are many legal aspects of such a transaction, which will be discussed in this blog post.

Such transactions often involve the sale of real estate which is owned by the business being sold. For example, if a pharmacy is being sold, the building in which the pharmacy is located may be owned by the business in question. In such a situation, the sale of the real estate would be part of the transaction in which the actual business is also being sold. For tax purposes, the amount paid by the buyer should be allocated separately to both the real estate (if applicable) and business in question. A further allocation may be made with respect to fixtures and equipment that are part of the transferred items. Therefore, if the total purchase price is $600,000.00, $300,000 may be considered the price for the real estate, and $300,000.00 for the purchase of the actual business. We recommend that all parties consult their accounting professionals to determine the most favorable allocation for tax purposes.

The first legal issue relates to the legal structure of the business being purchased. If the business is an entity such as a corporation, professional corporation (P.C.) or limited liability company (LLC), the entity and its assets can be sold to another party. The first step in this process involves confirming that the corporation is in “good standing” in the State of New York. This involves checking to ensure that the entity has made all necessary filings and is current in paying its franchise taxes. A certificate of good standing should be obtained from the New York State Department of State. In addition, all corporate documentation, including the stock certificates, stock book, and corporate seal should be delivered at the time of the completion of the purchase.

Of course, the purchasing party may also choose to create its own legal entity for the purchase of the business in question. In that case, the assets of the business would be transferred to the new entity. If a new entity is used, all existing contracts, equipment leases, business leases, and other legal documents will have to be transferred to the name of the new entity. It is possible that notice to and consent of certain parties, such as an equipment lessor or landlord, may be required to make such a transfer.

A contract of sale should be drafted by the attorney for the selling entity which delineates the legal rights of the parties to the transaction. One aspect of such a contact may be a “non-compete clause.” A non-complete clause limits the selling party from owning or operating a similar or identical business to the one being sold. Such clauses are customarily limited by both a period of time and by geographical area. For instance, a contract for the sale of a dental practice may prohibit the selling party from operating a competing dental practice within twenty miles of the practice being sold, for a period of five years after the transaction is complete.

Another important consideration is the structuring of the payment by the purchaser. In most business sales, especially those also involving real estate, the full purchase price is not paid at closing. Instead, a certain sum is delivered as a downpayment, and then a Note is delivered under which the remaining balance is to be paid over a term of several years. Such payments then may be guaranteed by both the business and by a personal guarantee on the part of the purchaser. If the purchaser defaults in their future payments, the seller may foreclose on the business and equipment sold (including any real estate), and may also obtain a personal judgment against the purchaser’s guarantor for any unpaid balance.

The issues discussed in this post are just a small sample of the legal matters involved in the sale or purchase of a business or professional practice. If you plan to be involved in such a transaction, we recommend that you contact our firm for a consultation so that all legal aspects may be considered.