#287 UTLRadio - Selling Your Small Business: How Complicated Does it Have to Be?
Transcript from UTLRadio Episode #285. Don't forget to subscribe to the podcast!
You're listening to Understanding the Law radio with your host Attorney Peter Lamont.
Hi and thanks for joining me for this episode of Understanding the Law radio. This is episode 287 and I'm your host Peter Lamont. Today we're going to be answering a question that was submitted by Stephanie from Westfield New Jersey and it concerns selling her business. Now specifically she wants to know if she can just make a simple agreement and sell it to the buyer without having a formal closing or any you know pomp and circumstance the way that you would normally do with something like a presidential house closing something like that.
So we're going to answer that question. But before I do I just want to remind you of a few things. First of all please make sure that you subscribe to this podcast over on iTunes and rate it review it. Let people know what you think about it. Let me know what you think about the podcast. Also please make sure that you visit our YouTube channel and check out our extensive video library. Oftentimes if we answer a question on the podcast we'll get a request to do a more in-depth look via video and I'll kind of expand upon what we've talked about and give some additional information. So if that's of interest to you make sure you check out the YouTube channel and subscribe so that you know when new videos are put up. Also make sure that you check out our Web site at UTLradio.com that's short for Understanding the Law radio UTLradio.com.
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All right so let's get back to Stephanie's question. Now it's a good question because oftentimes what happens is if you have a small business and let's say for example in Stephanie's case it's a small business where she has some assets, equipment, furniture, computers, things like that. But she doesn't own the property she's renting the property. She has a lease and the lease is going to expire in the next two months. And what she's trying to do is sell her business which essentially is the business name the company itself and all of the tangible assets within that location to a buyer. And there's no property transfer.
OK. Now when I say there's no property transfer oftentimes a business owner might actually own the building or property where they're located. So for example if you happen to own I don't know a landscaping business and there is a piece of property attached to your business where there's a garage and you store things maybe you own that piece of land and you want to sell the entire thing the land the business. It all goes together. That's a little bit different than if you want to just sell the assets of your business. And when you sell the assets especially if you're a small business I think that there is this almost temptation to kind of just you know jump some hoops and make this thing happen as quick easy and simply as possible. And I get that completely because when you're selling a business especially if you have a buyer who is very eager to make the purchase and they want to sort of just get this thing going and they don't want to be bothered with a lot of the minutia and the paperwork and the lawyers and all that stuff there's this tendency to just say hey can we just sort of you know handshake this thing and be done with it.
Well the simple answer is no you can't. And I'm going to tell you why. First of all if you're selling assets and you've had a company that you've paid taxes on whether it's an LLC an incorporated entity or whatever you have to make sure that you are properly transferring that business for tax purposes and for liability purposes. I once had a client who came to me who had sold an LLC but they didn't properly transfer the ownership of the company.
It was kind of like one of these handshake deals that we're talking about. And somebody was injured on the property of the LLC and because it hadn't been properly transferred the injured plaintiff sued this client and the client couldn't understand how after he transferred the company and he's not making any money from it, he could be sued. And turns out that because it wasn't properly transferred he was still on the hook. And you know long story about how he got them out of that. But bottom line here is that simple answer You can't just shake someone's hand take a payment and transfer your business to them without doing things that are necessary. And oftentimes it's much better to do it through a lawyer. Now I'm not saying you've got to pay a ton of money especially if you're a small business because you know if your business is being sold for ten fifteen twenty five thousand dollars maybe a little bit more.
You certainly don't want to spend a quarter of that on a lawyer and there's no reason that you should. But what you need to be aware of is that you've got to make sure that the corporate documents are being transferred right so that you are no longer on the LLC or the company. You have to make sure that your tax forms are completed properly so you don't get taxed for things that you shouldn't be. You also need to make sure that you have a proper agreement in place a purchase agreement or a sales agreement whatever you want to call it a contract. That's got to be something that you can go back on in the event that there is a problem with the transaction.
And that's typically something that you want an attorney to prepare. You don't want to be looking online for some sort of sales contract that you're going to pick apart and edit to make it fit what you think it's supposed to. You don't want to do that not with something like your business. The other thing that you've got to look at you've got to look at your lists of assets because especially in states like New Jersey when you're transferring assets even if it's not a ton of assets you need to submit to the state of New Jersey a form called the bulk sales notice and you need to identify to the state of New Jersey what it is you're selling. You know it's purpose is for a few reasons. First of all they want to make sure that none of the assets are encumbered.
In other words you don't have liens on them and you're not trying to improperly transfer something. So they look at that. But that's a necessary document. You need to be able to do that. You also need to prepare a bill of sale so there's a whole bunch of things that I'm talking about here that are not super complicated. Right
. If you're a small business and you're just trying to sell a small amount of assets for your small LLC and a lawyer says to you that they want a quarter or more to help you with that transaction you're probably overpaying.
So the answer to that lawyer problem is you need to find a lawyer that is experienced in business law that understands what you're doing and understands that you can't take large chunks of money from someone who has a very small profit that they're going to be making on to sell their business. So if you get somebody like that then that's not the right person. Maybe they don't know what they're doing and that's why they have to charge more money because they have to sort of muddle through the transaction. But I think that it's important if you are listening to the list of documents that I'm talking about here that you make sure that you've got somebody that knows what they're doing preparing them. OK. Also there's things like you know financing is the purchaser going to be financing this transaction or is it a cash transaction.
A lot of times a smaller company purchase could be a cash transaction. Maybe you're going to purchase a small landscaping business and it's only fifteen thousand dollars and you've saved that up and now you're going to make that purchase. Well you don't need necessarily to have loan documents obviously you're paying cash but you do need to document this transaction. You do need to sort of have a formal closing and a closing especially with something like a business transaction like this, it doesn't have to be a two hour ordeal where everybody is signing all kinds of things. This could be a simple matter of exchanging final documents exchanging whatever paperwork you have inventory lists things like that and being done with it. Now recently we did a sale of a pizzeria and it's the same kind of thing that we're talking about here small business right, not a tremendous amount of profit, and it was going to be a cash sale. Well we still needed to submit documentation to the state because there were pizza ovens there were other things that were being exchanged. We found out from the purchaser that what they wanted to do is actually dump the name of the business and create a new LLC and operate out of that new LLC. So you know that was something that needed to be worked into the purchase and even though it was a simple transaction compared to others there was still work that needed to be done. That if not done properly you whether you're buying or selling could end up being liable for money for damages. And you don't want that. You don't want tax liability.
You don't want some sort of personal injury or product liability claim coming out of the woodwork later. Make sure that if you're going to sell a business regardless of its size that you contact a business lawyer and let them help you with it. Again you don't have to take the guy that says oh that's roughly going to be half of what it is you're going to receive on the transaction. That's not the lawyer you want. You want somebody that's fair that's honest that knows how to do the job and can give you a price that makes sense. So I'd like to thank Stephanie for submitting the question and I hope that I've answered your question. You know Stephanie I completely get what you're trying to do which is just keep this very short and sweet and make it simple. But here in New Jersey there are things that must be done and I really think that it's in your best interest to get a lawyer help you with the transaction.
It can be very short. It could be a 30 day close. In other words you know you can have the entire business wrapped up within 30 days. But don't try to do this on your own and definitely don't do this via handshake because it will come back to bite you in the end. All right that's going to do it for this episode of business Q and A here on UTL radio. If you have a business or legal question that you would like to submit and have answered on the air you can do it a few ways you can give us a call at 201-904-2211 and let us know that you're calling because you want your question answered here on UTL radio.
You can also e-mail me the email address is firstname.lastname@example.org. That's email@example.com and e-mail me and tell me you have a question let me know what the question is and I'll make sure to answer it on one of the upcoming shows. You can also go to our website which is UTLradio.com and there's a place for you to submit your question online there if you'd rather do it that way. There's so many ways you can reach out to me on Twitter send me a tweet let me know you have a question and I'm happy to answer it for you. I think it's really important that we are constantly engaged in these discussions where you know even if it's a question that you know you don't feel comfortable asking because it's a silly question you know go back to your grammar school days right.
What did the teacher always tell you. There's no such thing as a silly question. Ask, because you might make a mistake that could have been prevented and that one little mistake could have a very large impact on you your business or your personal life. So don't hesitate to ask. You know it's free. We don't get paid anything for this. This is just a free service that we offer here on UTL radio and we want people to be educated so that they can learn more about the law or how to succeed in business and oftentimes the law and business are tied so closely together because so many of the things that we do on the business end are either controlled by regulations or laws or if you do something that violates the law or creates liability or negligence or whatever you can end up paying so much money to deal with that situation that it does have a financial strain on your business.
So that's it. Please make sure you send me your questions. Keep them coming and I'll keep answering them. We're going to do another business Q and A because I've got a number of questions pending here that are sitting in the in the holding tank. So we're going to do another one this Friday so you can tune in this Friday for another business legal and Q and A show. And then next week we'll be back with our Monday business and legal Week in Review and continue on with the schedule.
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