Key Considerations And Legal Requirements When Buying And Selling Boomer-Owned Businesses

Baby boomers, born between 1946 and 1964, represent the second-largest group of business owners, making up approximately 39% of small business owners, just behind Gen X at 47%, according to a 2023
United States Corporate/Commercial Law

Baby boomers, born between 1946 and 1964, represent the second-largest group of business owners, making up approximately 39% of small business owners, just behind Gen X at 47%, according to a 2023 Guidant survey. And according to a 2017 study by Wilmington Trust, 58% of privately held businesses lack a formal transition plan. For potential buyers of these boomer-owned businesses, demonstrating the capability to implement a beneficial and seamless transition plan can significantly increase the likelihood of their offer being accepted.

It is important to understand that when purchasing a business from a boomer, you're often acquiring the culmination of their life's work, which sellers are keen to ensure that their company will be well cared for in the future, long after they have moved on from it.

With this in mind, there are a few key considerations and legal requirements aspiring buyers should consider as they enter the purchasing process.

Legal steps buyers should take to prepare when acquiring a business

Buyers should take the time to develop their goals and expectations. Once these are set, a potential buyer must confirm the available capital resources and possible targets, including preliminary research regarding the company's history, clients and customers, and factors unique to its business. It's also critical to have a form of a nondisclosure agreement (NDA) prepared beforehand and to be prepared to draft and negotiate a letter of intent (LOI).

Often, the time between entering into an LOI and finally closing on the purchase of the company can be much longer than either the seller or the buyer expects. As such, it's best to take the initial steps of buying a business as early as possible.

Critical elements of the due diligence process

Due diligence allows the buyer to gain a much more detailed understanding of the business and confirm that the acquisition is a good idea. Due diligence can generally consist of three major components: business due diligence, financial due diligence and legal due diligence. A buyer must assemble a team capable of assessing all the relevant information to be provided by the seller. If the information provided is incorrect, there may be recourse against the seller, but if the buyer misinterprets the information provided, there is simply no remedy.

How buyers can accurately value a business

Generally, three methods are used to value a business: the asset approach, the income approach and the market approach. Depending on the nature of the company, each approach can produce a similar result or very different rules. The amount determined by valuation is almost always not the amount of the purchase price but provides a beginning point for negotiations.

Consideration has to be given to what you are purchasing. Is it a company with patents and other invaluable assets? Is it a company based on the success of its people? Is it an industry that is stable or subject to substantial economic fluctuations? A base price with an earn-out structure is often used to determine the purchase price. This structure in turn gives the buyer some comfort that they will not have to pay for something they don't get and provides the seller with some comfort that they will receive full value for the company if things do go well.

Structuring an acquisition

Buyers must decide whether to buy the assets of the company or to buy the company itself. The tax and legal implications may differ for different entity structures, i.e., a C corporation, S corporation, LLC and/or a partnership. Sellers often want to sell the equity of the company as compared to the assets of the company. The tax consequences to the seller in an equity transaction are usually better; however, in buying equity, the company keeps all its liabilities, actual and contingent.

The benefits of an asset purchase include less risk for the buyer and the ability to get a basis in the underlying assets, including goodwill, equal to the purchase price. Conversely, the paperwork involved in selling equity is often far less complicated than that of an asset sale.

Legal advice during the transition period after an acquisition

Both the seller and buyer must recognize that the transition period is the key to the business' success and retaining key employees. Employees will naturally be both excited and anxious during this time, so it is imperative there is a transition plan that includes business and legal musts, particularly if a regulatory or legal requirement has an impact on employees that is necessary for the success of the transition.

Purchasing a business from the baby boomer generation is a complex and nuanced process that requires careful planning, diligent research and a clear understanding of the legal and financial implications involved. As the baby boomer generation continues to retire, the opportunities for acquiring established businesses are significant.

However, potential buyers must be well-prepared, not only to navigate the legal and financial landscape but to also honor the legacy of the sellers' life's work. With proper legal advice, thorough due diligence, and a thoughtful transition plan, buyers can ensure a smooth acquisition and set the stage for continued success in the future. Whether you are a buyer or seller, approaching the transaction with respect, clarity and professional counsel is crucial for achieving a mutually beneficial outcome.

Originally published in the Sacramento Business Journal

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More