@141 CHAP 3 旼컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� � CLOSING THE DEAL -- TAX CLEARANCES AND � � OTHER LEGAL REQUIREMENTS ON BUY OUTS: � 읕컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� @Q "If it's important, always get it in writing up front. @Q Your own mother will cheat you blind if you don't." @Q -- Jenkins' Tenth Law of Business Survival The legal procedures involved in buying an existing busi- ness can be quite complex. Even if you are the most self- reliant do-it-yourselfer, you should, in this particular situation, be sure to seek out the services of a competent business attorney to represent you. In order to ensure that you are protected under the law as fully as possible from liabilities you have not agreed to assume, you should, at a minimum, have your attorney take care of the following items in connection with the purchase: 1. Review the structuring of the deal, including the actual sale agreement documents. (If your attorney is not a tax specialist, it would also be wise to have a tax ac- countant review the terms of the agreement and advise you on possible ways to structure it better for tax purposes.) 2. Comply with the local Bulk Sale or Bulk Transfer Act. In most states, the buyer of a retail or wholesale establishment or certain other types of businesses must prepare a "Notice to Creditors of Bulk Transfer" and, us- ually, file it in counties where the business operates and also publish it in a general circulation newspaper prior to the purchase of the business. If this is not properly done, the seller's unsecured creditors may be able to "attach" the property that you thought you were buying free and clear. 3. Check for recorded security interests or liens. Be- fore closing the purchase, your attorney should check with the appropriate state office (usually the Secretary of State) to determine whether anyone has recorded a "security interest" (a lien or chattel mortgage) against the personal property of the seller's business. For a fee, the Secretary of State's office will generally provide a listing of any security interests that have been recorded as a lien against the assets of the business you are buying. Also, if the transaction involves a purchase of real property, you will also have to have a title search performed to see if the seller has good title and if there are any recorded mortgages or other claims against the property that the seller has failed to disclose to you. 4. Check on various state tax releases, including state employment taxes, sales and use taxes, and, if you are ac- quiring an incorporated business, you may also need to ob- tain tax releases for corporate income or franchise taxes, as well. Most states require you, as buyer of an ongoing business, to obtain one or more such tax releases, certify- ing that no delinquent taxes (of the various kinds indica- ted) are owed to the state by the seller. Otherwise, if you fail to withhold any such taxes owed by the seller from the purchase price, the state will be able to look to YOU for payment of such taxes, and you will have to try to get indemnity from the seller, who may by then be in Brazil or relaxing on the Riviera, enjoying your money. Your agreement of sale should, therefore, be conditioned on the seller first obtaining certifications or releases from all appropriate taxing agencies showing that the seller is not in arrears on any kind of taxes. 5. Review the terms of any important contracts, such as leases, that the seller is assigning to you, to make sure that such assignment is possible under the terms of such contracts, without any detriment to you. Similarly, if you are acquiring a business in certain kinds of regulated in- dustries, particularly relating to food, health, or liquor sales, make sure that proper legal steps are taken to trans- fer any federal, state or local licenses to you--otherwise, you may not be able to operate the business you have bought! 6. Look for environmental problems, and ways to protect you from them. If the deal involves acquisition of real es- tate, or of a corporation that previously owned real estate during its history, be aware that you may be subjecting yourself to virtually unlimited liability, far beyond the value of the property, if the the property is contaminated by hazardous waste substances, under the federal Superfund legislation. Thus, have your attorney include appropriate indemnity provisions in the agreement, in case such prob- lems come to light after the purchase. However, this is only a partial protection, since being entitled to indemni- ty and actually collecting it are two different things, as the seller may be long gone or broke by the time the EPA jumps down your throat, requiring you to spend astronomical sums to clean up the toxic waste on the site. Thus, you should also have an environmental consultant do soil sam- ples or other testing to attempt to determine if such con- tamination exists; or, in some cases, you should even in- sist upon having an "environmental audit" done before the transaction is consummated. In either case, you are much less likely to be held liable if a hazardous waste problem later shows up, if you can show you did "due diligence" (hiring experts, etc.) before acquiring the property, and that no problem was evident to experts at the time. Finally, note that in most states, you have only 90 days or so after acquiring an ongoing business to apply for the right to succeed to the seller's unemployment tax experi- ence rating, if you desire to do so. If the seller had a low experience rating, this may save you quite a bit in state unemployment taxes, since you will be able to "in- herit" the seller's lower tax rate, as a "successor em- ployer," rather than pay the regular unemployment tax rate that applies to a new employer. Be sure that you don't miss the deadline for making any required election to adopt the seller's experience rating. @CODE: CA @CODE:NF 旼컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� 쿎ALIFORNIA LEGAL REQUIREMENTS--PURCHASE OF A BUSINESS� 읕컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� State law requirements that your attorney needs to see to if you are acquiring a business in California include the following: . BULK SALE LAW. For bakeries, restaurants, garages, cleaning and dyeing establishments, retail or whole- sale merchants, and certain other kinds of busi- nesses, the buyer must prepare a "Notice to Creditors of Bulk Transfer" and file it at least 12 days before the sale with the county recorder in the county where the business is located. Notice must also be pub- lished in a general circulation newspaper in the ju- dicial district where the property is located and in the judicial district in which the seller's main California office is located, also 12 days before the transfer, under the California Commercial Code. . RECORDED SECURITY INTERESTS. Check for the existence of any recorded security interests on personal proper- ty of the seller's business with the Secretary of State's office in Sacramento. . EMPLOYMENT TAX RELEASE. You should require that the seller of the business obtain a "Certificate of Release of Buyer" (Form DE 2220) from the California Employment Development Department certifying that all employment taxes have been paid by the seller. . SALES TAX RELEASE. Similarly, you should require that the seller obtain a "Certificate of No Tax Due" from the state Board of Equalization, verifying that all California sales and use tax payments have been made by the seller. . FRANCHISE TAX CLEARANCE. If you are acquiring a cor- poration, require the seller corporation to obtain a tax clearance certificate from the Franchise Tax Board, certifying that all state of California fran- chise taxes have been paid by the corporation. . ALLOCATE SALES PRICE TO MINIMIZE SALES TAX. In Cali- fornia, unlike most states, much of the purchase price of acquiring the assets of a business is typi- cally subject to sales tax to the extent that the sale includes tangible assets such as furniture, equipment or machinery (but inventory will usually be exempt, if it is purchased for resale). Thus, you and the seller may be able to reduce the sales tax on the transaction by allocating (within reason) more of the purchase price to inventory (or to real property or intangible property) and less to equip- ment and machinery, in your agreement of sale. . EXPERIENCE RATING. Check to see if the seller's experience-based unemployment tax rate is less than the new employer rate of 3.4%. If it is, you will want to file E.D.D. Form DE4453 within 90 days after the business changes hands, in order to succeed to the seller's unemployment tax reserve account (and tax rate). . REPORT CHANGE OF OWNERSHIP OF REAL ESTATE. If you are purchasing a business that owns real property in California, you must report the change of ownership to the county tax assessor on a timely basis. Note that this will trigger a reassessment of the property at its current value, rather than the usually much lower "Proposition 13" value on which the seller's property tax was based. Thus, you will pay much more real property tax than the seller did on the same property, in most cases.