State laws can impose a variety of obligations on both the seller and buyer of a business. Our purpose here is to alert you to some of the implications of the most common requirements. For more detailed information on the requirements in your state, consult your attorney.
Bulk sales acts. Many states have laws on their books requiring that when a business sells the "bulk" of its materials, supplies, merchandise, or other inventory outside the regular course of business, it must formally notify all of its creditors at least 10 days before the pending sale. Otherwise, the sale will be ineffective against those creditors, meaning that they can still repossess the goods from the new owner, in repayment of the debt. In some states the creditors will also have a lien on the proceeds of the sale. Even if your business doesn't have inventory, you may be covered by the law because a number of states have extended it to apply to certain service businesses, most commonly gas stations, restaurants, and bars.
The purpose of the law is to give your creditors a chance to try to collect anything you owe them before you pack up and leave town. After all, your creditors know nothing about your buyer, and might or might not have extended credit to him, if they did know. The notification process can be quite cumbersome if there are a lot of creditors, although some states permit printing a notice in a general circulation newspaper as an alternative. Another drawback to the law is that you may prefer that news about your impending sale be restricted until it actually happens. The state laws generally allow the notification requirements to be waived if both parties agree, but then the buyer will want you to agree to indemnify him or her against any claims made by your creditors.
Another part of the bulk sales acts requires you to give the buyer a list of all your known creditors, their business addresses, and the total amounts owed to them. The list must also be filed with the appropriate state agency, so that creditors have access to it.
Recorded security interests. Before the buyer closes the deal, he or she will want to be sure there are no recorded liens or other security interests (known to lawyers as UCC-1 filings) against any of the assets. Therefore, the buyer's lawyer will order a search, much like a title search for real property, through the appropriate state, county or other records. Once the deal goes through, you in turn will need to have your lawyer record any security interests you will have in the buyer's business or in particular assets such as his or her home or other property.
State tax certificates. In some states, you must obtain a certificate from the appropriate tax authorities showing that no taxes are currently owed, and provide this to the buyer. The most common taxes covered are sales and use taxes due on sales to your customers, and unemployment insurance taxes due on your employees' payroll. If you owe any taxes, the buyer may be required to hold back enough of the purchase price to cover your bill, and to remit it directly to the state tax authorities.
State sales or transfer taxes. In some states, the sale of a business or its assets can itself be subject to sales tax. Other states tax the sale of stock or other securities. The tax is not usually significant enough to sway your decision to sell stock or assets if you're incorporated; nevertheless, you'll want to know what your tax liability will be for planning purposes.
Directors' and shareholders' approval. For businesses organized as corporations, state laws and your own corporate charter may require that your Board of Directors approve the transaction. In some situations the stockholders must also vote. This is most commonly necessary for sales of the business's assets (rather than stock) and for tax-free mergers and reorganizations. A vote of the buyer's Board of Directors and stockholders may also be necessary. Where the deal is structured as a stock sale, however, shareholder approval is not usually required.
Minority shareholders' rights. If you have any shareholders who are not pleased about the deal, your state law may give them certain protections. In many states, minority shareholders have the right to an independent appraisal of the business, and have the right to be cashed out based on the appraisal at the time of the sale. In addition to state laws, your corporation may have buy-sell agreements in place that must be honored.