A Guide For Buying and Selling Small Businesses in Texas

Buying and Selling Small Businesses in Texas

When it comes to buying or selling a small business in Texas, many find themselves unsure of the process and the legal requirements involved. Whether you are purchasing or selling, understanding the distinctions between asset sales and entity sales, as well as the implications of each, is crucial for a smooth transaction.

Understanding Asset vs. Entity Sales

The first question we often ask clients at our firm is whether they are looking to purchase the business entity itself, such as an LLC, or just the assets of the business. This distinction is critical as it affects the liabilities and responsibilities that will transfer to the buyer.

Most buyers prefer an asset sale because it generally does not include the transfer of the seller's liabilities. When buying just the assets, the buyer can avoid inheriting any outstanding tax liabilities or potential lawsuits associated with the business entity itself.

An entity sale might be required if the business has valuable long-term contracts that cannot be easily transferred to a new entity. For example, if a software company has a lucrative contract with a large corporation that is tied to the business entity, buying the entity instead of just the assets might be necessary.

The Process of Buying or Selling a Business

Once the type of sale is determined, several steps must be followed to ensure a legally sound transaction:

Real Estate and Lease Considerations

If the business owns real estate, separate purchase and sale agreements are necessary for the real estate and the business assets. These contracts should be contingent upon each other to ensure that if one falls through, the buyer is not required to close on the remaining portion of the acquisition.

For businesses that lease their space, an assignment of the lease will be required. This involves getting the landlord's consent to transfer the lease from the seller to the buyer. It is also preferable for the seller to engage in a full assignment of the lease, thereby being released from full liability associated with the lease. Legal representation is crucial during this process to negotiate favorable terms and ensure that liability issues are properly addressed.

Financing the Transaction

Many small business sales involve some form of financing. Commonly, buyers utilize an SBA loan for the primary funding component, accompanied by seller financing for a portion of the sale. This setup requires drafting a promissory note and a security agreement to protect the seller’s interests, along with a UCC-1 Financing Statement filed with the Secretary of State to perfect the seller's lien on the business assets. 

Buying or selling a small business involves numerous legal considerations and procedures. It is important to find legal representation that specializes in assisting clients with these transactions, to ensure that your business sale or purchase goes as smoothly as possible.

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