Whether you are in the position of selling or acquiring a business, it is important that you are familiar with the relevant laws. Laws governing human resources, federal income tax payments and corporate management can all have an impact on the acquisition process. Here are some of the most relevant U.S. laws that you should understand before purchasing or selling a business.

Export Control Laws

Depending on the nature of your business, you may be governed by certain export control laws. Export control laws are administered by the Department of State and Bureau of Industry and Security. If you sell products to the military or foreign governments, you may find that your business is subject to acting in accordance with stringent export control regulations.

In the event that a foreign company is acquiring a U.S.-based business, you should also be familiar with the export control laws of the foreign company’s homeland. Export control laws may have a significant impact on the products that you are able to sell to other countries.

The Acquisition Agreement

If you are proceeding with the acquisition of a company, you will need to draft an acquisition agreement. The two forms of an acquisition agreement are an asset purchase agreement or entity purchase agreement. In a purchase agreement, the new owner will acquire all of the stock of the old business. In an asset agreement, the new owner will purchase all of the property of the old business. Many owners prefer to use an asset agreement so that they can obtain total control over the old business.

The asset agreement may also have favorable tax implications for a buyer. A buyer will be able to take advantage of the depreciation of assets as soon as the asset agreement is completed.

Tax Implications of Buying or Selling a Business

Tax laws may also have several implications on the acquisition process. In some states, an individual may be unable to purchase a business until local or state taxes are paid. The buyer should request that a seller provide a certified letter to prove that tax debts have been paid. If tax debts at the state or local level remain unpaid, a purchaser may have to pay them off to proceed with the transaction.

Business owners should be aware of the tax deductions that they may be eligible to receive throughout the acquisition process. Tax deductions may be available depending on the type of business that is being acquired. These deductions change every year. In recent years, tax deductions have been offered for businesses that create innovative energy conservation methods.

New business owners will want to consider whether it makes sense to take an immediate tax deduction for the depreciation of the assets. If the items being transferred have a lower value, then the new purchaser may be able to reduce existing tax liabilities. Business owners should contact the Internal Revenue Service for advice.

Forming a New Legal Entity

Those purchasing a new business will want to consider the structure of the new entity. It may make most sense for an individual to create an LLC to minimize the risk of personal liability. If a business has past legal issues, the new owner could become liable for these issues. The LLC may provide a shield for the new owner.

The Letter of Intent

One of the most important legal documents to draft throughout the acquisition process is the Letter of Intent. The Letter of Intent will discuss the handling of employees and any existing liabilities of the business. The Letter of Intent is not a contractually binding document, but it does provide clarity and insight for the incoming owners. The Letter of Intent may serve as a foundational document for the creation of the contract that governs an acquisition.

Understanding Layoffs and Severance Payments

When a new owner acquires a business, he or she must be aware of how to proceed in the hiring or termination of employees. Employees may not automatically be transferred into the new structure of the business. A new owner may need to consider the cost of retaining certain positions. In the event that multiple people serve in a similar role, a new owner may have to make the difficult decision to lay off employees. State and federal laws govern the length and type of notice that must be provided to employees who are going to be laid off. In some cases, employees may also be entitled to certain severance payments. Contact the Department of Labor for more advice.

Conclusion

Before you proceed to finalize the sale or acquisition of a business, it is important that you remember to cover all of your bases and understand the relevant laws. Various agreements must be formalized before the acquisition of a business can take place. New owners may also face certain tax liabilities in the course of acquiring a business and should be prepared to handle them.