What is the legal purpose of buying and selling a business?
Well, that is a specific field of our firm and Tommy Gilstrap is very proud to have learned. He began practicing in 1975, with a general civil practice firms that did many areas of practice. The lawyers that he started working with back then began in the 1930s, ’40s and ’50s in El Paso helped organize hospitals, banks and represented very large corporate interests, one of which was a company, which was a building materials and retail outlet.
Tommy was in his late 20s when he represented the owner of that outlet and sold that company to a foreign interest for $46 million. He met that same man who owned a major quarry company during the early big growth in El Paso and he sold that company for $36.5 million. He was also in his late 20s-early 30s to help with those matters. So with that kind of a background, we, over the years, have had lots of clients that have either sold their stock in a closely-held company or where one stockholder or all the stockholders sell all the assets.
There are two kinds of business sales – the stock sale and the asset sale. There is a lot of difference between the two and that is one of the early evaluations that we do when someone wants to sell a company or someone wants to buy a company. “Is the transaction best suited as a stock sale or an asset sale?” “How is the buyer buying the company free from claims that the previous company had?” Creditors in claims. Those are matters we first and presently address.
Why would someone need or want to sell their business?
It would be difficult if not impossible to sell the stock of your company or the asset of your company in any kind of significant transaction without a good lawyer with experience in that field. You have got to make sure the assets are free of bank claims, any kind of liens at all. There is many representations and warranties the seller has to make as to the working conditions, and assets being free from claims, and liens, and incumbencies. If you are buying stock in a company, there is even more representations and warranties from the seller to protect you from unknown claims out there against the company whose stock you are buying. So it is a complex deal.
The first one Tommy did at probably age 26 was a $5,000 ice cream parlor here in El Paso. It was an older couple that has had it forever. And back then, that was a lot of money to them. His experience progressed from there into learning more and more from a very good law firm with very good lawyers. He has even represented a company that purchased a big company, and at the same time purchasing that company, it is selling part of it out. He helped them with what is called a double transaction and that was a very complex transaction.
Why do people need to get out of their business or want to purchase a different one?
Mostly for profit and depending upon your age. In the sale of a business, timing is everything. Everybody knows how the economy goes up and down. And in different areas of the country, the economy moves at different paces and there is times when your company is at premium and doing well. In five years to now, you may have more competition or the field may become moot or remote, because of the change in technology. But mainly it is people that are very proud of their businesses. They have built them usually from scratch or bought them and then built them up, and they are very proud of them and it is time for them to consider their retirement plans, and selling their companies, and hopefully passing along to someone that will care for it as much as they did.
What are the legal steps in buying out a business? Something a little specific.
The first thing we do of course is meet with the client and understand what kind of business they have, what kind of products they manufacture, what kind of services they provide. We want to see their financial statements and tax returns. These are the things that the buying people are going to want to see. “What kind of income flow am I buying?” That is what the buyers are looking for. “If I pay you this much, prove to me through your tax returns and your financials that you will certify and warrant and represent accurate along with your CPA & lawyer that this is the income that I am going to make if it continues on in the same manner during the period you operated it.”
So, there is a lot of evaluation of the nature and extent of the assets, and the nature and extent of the income and expenses that are incurred in operating the company, so we evaluate what the company’s worth. There are also a network of brokers out there who specialize in brokering the sales of companies from both sides, buying and selling. In this day and age, there are a lot of companies, international companies from China to Europe that are interested in buying in to the growth and prosperity in America. We have represented a man who sold a very big and productive mail contract hauling business for the Federal Government to the Chinese. It is a very specialty field again.
And if it is a big enough company, sometimes we engage brokers who have a national and international database of companies and people that are looking to buy businesses.
Why choose your firm for help when I want to buy or sell a business?
Just because of the wide variety of the experience we have. Our firm had a client who was of a great corporate business. A bankruptcy lawyer talked him into filing Chapter 11 bankruptcy, and then they utilize bankruptcy provisions complexness to sell the company at an auction and had to tell the shareholders, “We represent the company in the bankruptcy. We cannot represent you.” So the shareholders come to me and we were able to get the company sold out of bankruptcy and benefit not only the creditors who were being protected by the bankruptcy court and the bankruptcy lawyers, but to give money for the shareholders who were at the bottom of the line.
The IRS gets paid first, employees get paid, security creditors like banks get paid, and at the end of the line are the shareholders called equity security holders in bankruptcy laws.
So from a complex $65 -$67 million sell out of bankruptcy down to $46 million, $36.5 million to a $5,000 ice cream parlor. We have just had a lot of experience in 40 years in representing companies that provide services and companies that provide the manufacturing of products and retail sales.