Questions Surrounding Purchase of Shares vs. Severing Buisness and Purchasing Half?

[Greentips]

We are looking into purchasing into a business in our local area, which we've both been involved in already for many many years, know the current owners very well, have worked with them for years as well. We are very comfortable being able to work with these people first of all.

The situation is: Currently, two locations for one business. Three owners - mother, father, son. Mother and father live out of/operate location 1, which was the original location. Son lives out of/operates location 2, which has been functional for 6ish years. It is time for mom and dad to retire for good, so they are looking to sell off the first location, and also the portion of the business which runs out of that location.

We originally thought they had wanted to sever the business completely and sell off the first half, but after further discussions discovered they wish to sell off 50% of the shares instead and continue to have the business run entire. We are willing to explore this option as there are benefits to us as well going this route. But we were hoping to get some general advice and words of wisdom from others as we are less familiar with this type of set-up (of course we will be talking to an accountant and lawyer as well, but it always helps to have real-life advice). Some things we are thinking:

-How does everyone determine what salaries are paid to what owners?
-How do we account for differences in contribution to the overall revenue between the two locations (we believe our location and operation will contribute more)
-Any general advice about the structure of this type of business arrangement: set-up of banking accounts, approval/decision making process for all decisions affecting the business, essentially how much is separate and how much is amalgamated in this type of structure?

Thanks!

[rdc]

Greentips,

Do you know anything about the structure of the existing business? When you say they now desire to sell 50% of the shares, this tends to imply that they are currently organized as a corporation.

Generally, purchasing the shares of an existing company will work very differently than purchasing the business assets outright (goodwill, trademarks and IP, tangible assets, etc).

If you purchase the business outright, you own it and can operate it however you please, including forming your own entity and setting your own rules for how it operates (including how that relates to you and your partner).

If you purchase shares in the existing company, the old company still technically exists, and you (and your partner, if he also is a purchaser/shareholder) are a shareholder. This is where things get tricky and due diligence is required: it's dependent upon state law, the company's bylaws and potentially, other contracts such as shareholder agreements, voting trusts, etc. These will determine exactly what your 50% shareholder interest means. This could vary greatly; depending on how the company is structured (including what classes of stock are issued and transferred), you could have complete control over your part of the company, have zero control, or somewhere in between.

The shares generally confer the ability to elect board directors, who may then set policy (again, according to powers and responsibilities enumerated in the bylaws/state corporation act). Potentially, you could end up in a situation where there is conflict between you (and/or your partner) and the Son or any other shareholders/directors. It could be a sticky situation and you definitely require a law firm to figure this out and give you a complete answer and ideal outcome.

The questions regarding salaries, revenue, and banking accounts are also governed by these same concerns.

Consult with an attorney, and look for one with corporate/business law experience. While I generally suggest that those individuals starting low-capitalization, low risk, small internet businesses can get by with self research and/or legal coaching, in the case of a true business acquisition, I would very strongly suggest finding a good attorney and not cutting corners (that includes accountants who purport to offer corporate/business legal advice). You guys are doing serious business since money and corporate governance issues are involved, so it's best NOT to cut corners at a juncture like this.

Please let me know if I can be of further assistance.