LEGAL ASPECTS OF BUYING A BUSINESS IN MICHIGAN

INTRODUCTION


If you are purchasing a business in Michigan, it is crucial to select an experienced business attorney who will effectively advise you throughout the transaction. The attorney should conduct a thorough investigation of the target company, identify any risks, and properly draft and negotiate the various agreements that will document the transaction. In this blog post, I discuss the legal aspects of buying a business in Michigan.


LEGAL ASPECTS


1.) Transaction Structure and Tax Considerations


A business acquisition can take many forms, including (i) asset purchase, (ii) equity purchase and (iii) merger. Each form has its own benefits and drawbacks. The transaction’s structure will often depend on the parties’ specific business objectives and respective bargaining power.


An asset purchase is a transaction that involves the purchase of some or all of a selling company's assets. Each asset being sold must be identified with reasonable certainty, with an allocation of the purchase price among each asset. In an asset purchase, the purchaser assumes only a limited list of liabilities set forth in the acquisition agreement, subject to doctrines on successor liability. Asset purchase transactions are generally the most tax favorable to a purchaser because it provides purchaser with a tax basis in the purchased assets equal to the purchase price of such assets in the transaction. This allows purchaser to depreciate the purchased assets at a higher cost basis, rather than acquire the selling company's tax basis in the assets. For a selling company, asset acquisitions can involve double taxation issues unless the selling company is a pass-through entity.


An equity purchase is a transaction that involves the purchase of the equity interests (stock, membership units, etc.) in a target company from the target company's equity holders. An equity purchase is generally the most efficient transaction form because it may not involve the assignment of contracts or the firing and hiring of employees, among other things. In an equity purchase, the purchaser acquires the business entity itself, including all of its assets and liabilities, known and unknown.


A merger is a transaction that involves the combination of a target company with the purchaser or a subsidiary of the purchaser. There are many varieties of mergers and merger structures, and there are a variety of reasons for using one form over another.


2.) Legal Due Diligence


Legal due diligence is the process of investigating and evaluating a target company or its assets in connection with an acquisition or other proposed transaction. The purpose of legal due diligence is to confirm certain items regarding the target company, understand whether any third-party consents or other actions will be required in connection with the transaction, and assess the potential risks of a transaction. Due diligence can be extensive or narrowly tailored. Purchaser’s counsel will typically conduct lien and litigation searches on the target company and its owners, prepare and furnish due diligence request lists to seller’s counsel, review all documentation and information provided, and prepare a memorandum for the purchaser detailing its findings. Due diligence should be initiated early in the transaction so that any issues can be addressed in the transaction agreements or otherwise resolved prior to closing. Failure to properly conduct legal due diligence on a target company can give rise to many issues, including successor liability.


3.) Preparation and Negotiation of Transaction Documents


An acquisition agreement is the definitive agreement that documents a business acquisition. Acquisition agreements typically contain: (i) a description of the transaction, including its structure, what is being acquired, and the amount, form and timing of consideration to be paid; (ii) representations and warranties, which are statements of past or existing facts and assurances made by the parties to the transaction; (iii) covenants, which are promises to take certain actions; (iv) closing conditions, which detail what must occur before the parties are obligated to close the transaction; and (v) indemnification provisions, which allocate risk for any breach of the representations, warranties and covenants by imposing financial responsibility on the party responsible for such breach.


The representations and warranties are often the most heavily negotiated provisions in an acquisition agreement. Purchaser will prefer broad language, whereas seller will prefer more limited language with knowledge and materiality qualifiers. The representations and warranties will reference certain disclosure schedules attached as an exhibit to the acquisition agreement. Disclosure Schedules either list (i) exceptions to the acquisition agreement’s representations and warranties, or (ii) other information. The disclosure schedules are prepared by seller's counsel.


Acquisition agreements also typically contemplate certain ancillary agreements, which can include: (i) promissory notes; (ii) escrow agreements; (iii) transition services agreements; (iv) employment or consulting agreements; (v) termination agreements; and (vi) non-compete and non-solicit agreements.


No two acquisitions are the same. Each acquisition will have its own unique terms. When acquiring a business, it is essential to have an experienced business attorney in your corner who will properly draft and negotiate the transaction agreements that will document your particular transaction.


4.) Third Party Consents and Notices


When a target company undergoes a change of control or sells all or substantially all of its assets, the parties may need to obtain consents from or provide notice to third parties doing business with the target company. Whether such consents need to be received or such notices need to be given will depend on the structure of the transaction and the terms of each individual contract which the target company is a party to.


5.) Post-Closing Matters


Depending on the complexity of the transaction and the terms of the acquisition agreement, certain post-closing matters may need to be addressed.


CONCLUSION


At Dawisha Law, PLLC, we conduct comprehensive legal due diligence on target companies so that our clients are able to make informed decisions regarding the businesses they are acquiring. We also carefully and thoughtfully draft and negotiate transaction agreements to properly reflect a transaction’s business terms and achieve a client’s specific business objectives.


If you need legal assistance with your next business acquisition, contact us today and let us help you with your legal due diligence and business acquisition needs.


DeLone Dawisha

Principal and Founder

Dawisha Law, PLLC

248-904-5123

ddawisha@dawishalaw.com