selling a business

Important Steps to Take When Selling a Business

Selling a business, no matter how large or small, is always a complex venture. It involves several legal considerations as well as scrutiny and evaluation from professionals, such as lawyers, brokers, and accountants. You should get a business attorney on your team as soon as possible to ensure the sale is done right.

The profit you earn from selling your business will depend on the timing of the sale, strength of operation, structure of the business, and the reason for sale. Most importantly, your interests will be best protected when you have a knowledgeable business lawyer on your side.

Here are a few important steps that can help you maximize the revenue you get from selling the business:

  1. Define Goals and Exit Strategies

Business owners should have a broad range of transaction options to sell their businesses. These options affect the final price paid by buyers. Your goals will drive the type of buyer your company desires. In general, business buyers are of three types:

  • Employee buyers
  • Financial buyers
  • Strategic buyers

Each of these options has its individual pros and cons.

  1. Determine Reasonable Valuation

A critical step in the sale process is to determine a reasonable valuation. You need to have realistic expectations so that you don’t turn off potential buyers. Deals can quickly crash when sellers and buyers are unable to agree on a purchase price.

The most experienced advisor will not be able to bridge a large gap. You should engage valuation experts before listing the company for sale. This will provide a basis for you to understand the value of your business. The final price is determined by the quality of the business presentation, potential buyers, and negotiation with buyers.

  1. Enhancing Value

A company’s strategic plan, financial status, and growth opportunities can be used for increasing the overall value of the business over a period of 6 – 12 months. Regardless of the size and scalability of your particular company, you should carry out the necessary steps for increasing its market worth. You can employ strategies like streamlining processes, focusing on core competencies, reducing customer concentration, and reducing expenses.

  1. Gather Existing Financial Information

An essential task in the sales process is to spend enough time for evaluating and presenting the company’s business and financial history. Typically, business owners prepare their financial statements for taxation and not for selling it. Investing the time to present your earning power can have a major impact on how your business is viewed by buyers.

  1. Organize Due Diligence Information

Potential acquirers expect the facts and records to be properly documented and organized while evaluating a company. You should review the corporate governance documents, incorporation papers, permits, employee agreements, licensing agreements, and leases. These records are usually shared in a data room, which can be cloud-based, in the form of a banker’s box, or an actual room.

The seller’s mergers and acquisitions advisor needs to organize the data room so that buyers can easily and quickly find the information they are looking for. A poorly organized data room may delay the due diligence process which can in turn hurt the seller. It is recommended to choose an experienced business attorney to be the advisor.

Your attorney can create a high-quality business summary that includes due diligence and financial information. This business summary will demonstrate financial information, growth opportunities, and market niche. This report is also known as CIM or confidential information.

  1. Qualify Potential Buyers

There are usually a large number of buyers for lower and middle market companies. Buyers need to use tools and resources for researching and accessing qualified buyers.

You would need to review competitors, strategic buyers, customers, private equity firms, and other entities with suitable capital. This is the most time-intensive step in the entire process. You need to do this right to approach the best buyers and close the deal.

There are many potential buyers that may express an interest but are not qualified for various reasons. Your attorney will do the groundwork for you by screening potential buyers. This will help you and the management to focus your efforts on growing the business instead of wasting it on unqualified buyers.

  1. Negotiate a Price

There are several professional and financial considerations in the sale of a business. The purchase price is only one element. Other components to negotiate include:

  • Earnout
  • Stock sale versus asset sale
  • Seller financing
  • Terms of sale
  • Security for financing
  • Liabilities assumed by the buyer
  • Employment contracts
  • Current assets retained by the seller
  • Non-compete agreements
  • Equity ownership
  1. Documentation

There are three stages of interest in a company – IOI (Indication of Interest), LOI (Letter of Intent), and Purchase Agreement. Things start getting serious from the LOI stage. This gives the potential buyer an exclusivity period to assess and evaluate the company.

The purchase agreement, employment agreement, non-compete agreements, and other documentation need to be drafted during this exclusivity period. The purchase document is the definitive document that outlines all the terms of the sale.

Consult With a Qualified Business Attorney in Alabama Today

Selling a business is a complex process in which any error can cost you thousands of dollars. The experienced legal team at the BHM Law Group can guide you every step of the way and make sure that your rights and financial interests are fully protected. To set up your free initial consultation, call us at 205-994-0902 or reach us online.

buy-sell agreements

Important Provisions That Should Be Included in Buy-Sell Agreements

Succession planning is a prudent step to ensure the longevity of your business. Whether you are considering starting a new business with a partner or already have an established business, you can consider formulating a buy-sell agreement as a part of your future exit strategy. Buy-sell agreements are one of the ways to create an orderly plan for ownership transfer with pre-negotiated terms. You can avoid complications with this well-defined exit strategy in the best interests of your business.

Overview of a Buy-Sell Agreement

Buy-sell agreements are documents drawn between two or more business partners. It outlines what will happen to individual business interests if any partner leaves the company unexpectedly. You can avoid ugly disputes with your partners by having an agreement in place beforehand. This will also prevent disruptions to the business from a loss of a partner.

Buy-sell agreements are helpful in a wide range of scenarios, including:

  • Partner being forced out or terminated
  • Partner resigning
  • Partner retiring
  • Partner suffering permanent disability
  • Partner filing for bankruptcy
  • Death of a partner

Your business could land in major trouble in any of these scenarios without a buy-sell agreement in place. For instance, if a partner gets divorced, the former spouse may get their hands on the partner’s interest in the business. This can create a lot of trouble for your business. Buy-sell agreements can provide a ready remedy in such scenarios.

Importance of Valuation Clause

The agreement should include detailed information regarding the worth of the business. You should ensure these numbers are absolutely accurate. You may want to have the company professionally appraised or use a clearly defined formula for obtaining the value of the business.

It’s expensive to have a business appraised. You need to consider the best strategy for all parties involved as well as the business. The valuation provision should clearly state the value of the business and a fair purchase price. This will help in avoiding suspicion and conflicts of interest.

Provisions for Funding the Buy-Sell

The Buyer should have the financial ability to fulfill the payment terms listed in the agreement. Installment payments and life insurance policies are popular funding options for buy-sell agreements besides cash sales.

You shouldn’t assume the Buyer will have the necessary cash at the time of the purchase. In fact, many people find it difficult to borrow 100% of the purchase price as well. There are several other options that a Buyer can use for making the payments. It is important to consider the individual benefits and limitations of each option.

Identification of Parties and Qualifying Events

A buy-sell contract requires at least two parties for it to be valid. There has to be a Seller and a Buyer. This may seem obvious enough. Based on this, choosing the Buyer requires careful consideration. It would also require the consent of all other parties in the business. There may be licensing requirements and legal obstacles to consider depending on the type of business.

You should speak with your partners or any other outside buyer to discuss the qualifying events. These are the events that will trigger a buyout. You should work with an accomplished attorney to anticipate any life events, which may interfere with the partnership. This can be illness, divorce, retirement, and death. Don’t forget to include breach of contract and obligations.

The goal should be to cover all bases so that everyone’s interests are protected in case of a buyout. It’s critical that the buy-sell agreement is in line with the estate plans of each partner. This will prevent any conflict in purchasing the share of a deceased partner’s business. You don’t want to get caught in the middle of a costly dispute among the heirs of the deceased partner.

Understanding Tax Implications

You should understand that the proceeds of any purchase and sale of business ownership are taxable. You should work with your accountant and attorney to structure an agreement that minimizes the tax liability. You may end up having a higher tax liability if you do not. This may just offset any profits from the proceeds.

Having an attorney on your side can be helpful since a buy-sell agreement has to account for a broad range of possibilities. Any mistake made in the document can cause a major headache at a later date. You can ensure your interests are protected by having the buy-sell agreement drafted by an attorney. This will also help in minimizing any potential hassles if a partner decides to leave. Lawyers can ensure that the buy-sell agreement complies with the necessary laws affecting your business.

Choose a Qualified Business Law Attorney in Alabama to Protect Your Business Rights

There are numerous things that need to be taken into account while drawing up a buy-sell contract. The time and efforts you invest right now in the process will ensure the longevity and health of your business in the long run. The attorneys at BHM Law Group will do everything possible to ensure you and your family receives the maximum benefit from your years of hard work. To schedule your free and confidential consultation with us, call us at (205) 994-0902 or write to us online.

enforcing a non-compete agreement in Birmingham Alabama

How Enforceable are Non-Compete Agreements in Alabama?

Alabama has a booming market for a wide variety of businesses. If you are planning on starting a business in the state, you should find yourself a good business attorney. It is vital the attorney has a thorough understanding of non-disclosure provisions as well as non-compete agreements. This is particularly important if you have protectable business interests and want to keep operations and information insulated from competitors.

How does a Non-Compete Agreement Work?

A non-compete agreement in Alabama is essentially a contract that places certain limitations on employees working to become a competitor against their current employer. This is for a certain specified period of time. The agreement needs to be solidified early in the business relationship. Typically, these agreements are enforced between an employer and their employee.

The employer enforces the agreement to prevent the employee from competing against the business in their next position. This includes starting up a new business within the same industry and field or working with direct competition within the same market. Alabama non-compete agreements prevent employees from recruiting any other current employees that may want to leave the company.

In short, there can be no poaching of current employees by a former employee looking to become a direct competitor of the business. Employers routinely add a non-disclosure agreement to the non-compete agreement to prevent employees from revealing sensitive information and secrets about the company’s clients, customer base, operations, salary, pricing, strategy, methods, ideas, future projects, practices, formulas, future products, vendors, public relations, trade secrets, mailing lists, and marketing plans among others.

These agreements can have a broad purview. Non-disclosure terms and non-compete agreements can be standalone agreements or sections of a larger contract. Typically, these are referred to as non-competes, non-compete covenants, non-compete clauses, and covenants not to compete. They demonstrate the same concept of protecting the company against the competition. They also prevent the leak of any information pertaining to the business.

An example of the benefits of a non-compete agreement may involve a company in a market that has under five businesses offering the same products or services. The company may use the non-compete agreement to prevent its sales staff or other employees from taking the list of clients to a direct competitor in the same geographic location. The company may ask all employees to sign the non-compete agreement.

Another example includes a tech company that wants to protect its design and system information. The company probably doesn’t want its developers to go and work for a competitor where they may share detailed information about the products and services currently on offer. A non-compete agreement will prevent former employees from sharing the information they know with other companies in the exact same tech niche.

Non-Compete Statute in Alabama

Alabama updated its non-compete statute, which went into effect on January 1st, 2016. Section 8-1-1 of the Alabama Code contains this statute. The general rule listed in the statute is that “Every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind… is to that extent void.”

In other words, the general rule followed in Alabama is that restrictive covenants in non-compete agreements that prevent a legal business, trade, or profession from carrying out business are not enforceable. There are exceptions to this general rule. Non-compete agreements are valid in Alabama if the agreement is signed by both parties, is in writing, and is supported by adequate consideration.

The agreed-upon restraint should involve one of the following restrictive covenants:

  • The employee’s position should be essential to the organization or management of the business
  • The agreement should be to limit certain types of commercial dealings
  • The non-compete agreement is associated with a business sale
  • The agreement is limited to a specific geographic location and the restraint placed is not for more than two years
  • The agreement is to prevent the former employee from soliciting the company’s current customers and the restraint placed doesn’t exceed 18 months
  • The agreement is made between partners in the event their business is dissolved, to prohibit each other from conducting similar business for a certain period of time in the specified geographic area

Difference between Non-Solicitation Agreement and Non-Compete Agreement

Non-solicitation and non-compete agreements both contain restrictive covenants typically executed between an employer and employee. However, there are major differences between the two. Non-compete agreements involve a restrictive covenant under which an employee agrees to not compete with their former employer in a specified geographic area for a certain time period.

The non-solicitation agreement contains less restrictive covenants. The employee basically agrees to not solicit the clients of the former employee. This is a subtle yet important distinction. Taking all of this into account, courts treat these agreements in a different manner.

Seasoned Alabama Business Law Attorneys are Here to Help

The attorneys at the BHM Law Group can help if you are a business located in Alabama and are interested in drafting legally valid non-compete agreements. Our dedicated attorneys will understand your particular situation and discuss all available legal options in order to protect your business interests in the best way possible. To schedule your free case review with our lawyers today, call us at (205) 994-0902 or contact us online.

llc vs inc

Understanding The Differences Between LLCs And Corporations

Business owners may have to choose between an LLC (limited liability company) or Inc. (corporation) when it comes to selecting a legal entity for their new business. Pertaining to this, which entity is the right one for your needs? It can be overwhelming to understand the intricate differences between an Inc. and an LLC. This is particularly true if you are just getting started. A knowledgeable business attorney can make things easy for you.

LLC vs. Corporation – Formation of the Legal Entity

There are several differences and similarities in forming a limited liability company and corporation. Both require filing a form with the Secretary of State. The document is generally called Articles of Organization for an LLC and Articles of Incorporation for a corporation.

There is more information required in the Articles of Incorporation as compared to Articles of Organization. The articles can be effective only when there are certain governing provisions included in them. Information required for LLC formation includes the manner in which provisions will be managed and the liabilities and duties of all members and managers.

LLC vs. Corporation – Protection for Owners

The primary reason for creating a legal entity is to avoid personal liability for business debts. LLCs and corporations have their separate legal existence. Members or shareholders own the LLC or corporation, and their liability does not exceed their investment. All debts, assets, and liabilities are owned by the business and not individuals.

Limited member and shareholder liability are well-respected and established rules. Based on this, this doesn’t mean that the shareholders or members are never liable. They are still responsible for any wrongdoing, such as breaching the provisions listed under the operating agreement. Shareholders and members can be held liable for the legal entity’s debts through a legal concept called “piercing the corporate veil”.

LLC vs. Corporation – Differences in Taxation

Limited liability companies and corporations are treated differently during tax time. LLC is considered a pass-through business entity for tax purposes. They are not required to pay federal income tax. The profits are distributed directly to the owners that get taxed on their personal returns.

There is a single level of taxation since only members get taxed. Moreover, this doesn’t mean that LLC is the better option. LLC owners may be required to pay an additional self-employment tax that is currently at 15.3%.

Corporations are of two types for income tax purposes – C and S corporations. C corporations are taxed under Subchapter C of the Internal Revenue Code (IRC) while S corporations fall under Subchapter S of the IRC. A corporation is taxed under Subchapter C by default when you incorporate. Based on this, there are provisions that can qualify the corporation to be taxed as an S corporation. This will allow the corporation to be treated as a pass-through tax entity.

LLC vs. Corporation – Post-formation Compliance

There are certain obligations that both corporations and LLCs need to meet in order to remain in good standing. This includes paying franchise taxes, filing annual reports, appointing a registered agent, and maintaining a registered office.

The franchise tax is a state fee for allowing a legal entity to exist and do business. Annual reports contain information about the company. There are penalties associated with not paying franchise taxes or filing annual reports. This can eventually lead to loss of good standing and administrative dissolution.

Post formation compliance needs to be followed by both LLCs and corporations.

LLC vs. Corporation – Registered Agent Compliance

You will need to appoint and maintain a registered agent in the formation state whether you choose an LLC or a corporation. Registered agents are appointed to receive official communications from the state. There is no upper hand since both LLCs and corporations are required to do this. This is a critical choice and making the wrong choice can result in severe consequences for the legal entity, such as loss of good standing and default judgments.

LLC vs. Corporation – Management Structure

There are different management structures followed by LLCs and corporations even though management in both legal entities is governed by governing documents and statutes. The Articles of Organization and an operating agreement are followed by an LLC while Articles of Incorporation and bylaw are followed by a corporation while determining the management structure.

LLC laws don’t have as many management requirements as corporation laws. Corporations are required to provide notice and hold annual shareholder meetings, and directors’ meetings among other things.

In contrast, LLC statutes simply leave it up to the members for determining the management structure. Furthermore, it needs to be in accordance with the operating agreement. Meetings are not required by law and managers don’t necessarily need to be natural persons. This allows LLCs a greater degree of flexibility.

Discuss Your Legal Concerns with a Dedicated Alabama Business Attorney

Limited Liability Companies and corporations have several similar characteristics and some significant differences. It’s critical that you assess your unique situation and business goals before deciding on either one. The proven lawyers at BHM Law Group can help you compare the differences to arrive at a well-considered decision. Schedule your free appointment with our business lawyers today. Call us at (205) 994-0902 or contact us online.

how to form a non-profit corporation in Birmingham Alabama

How to Form a Non-Profit Corporation in Alabama

Starting a nonprofit is an excellent way to translate your vision into reality if you like helping others and serving the community. Some of the common types of nonprofits include educational, religious, animal welfare, human service-oriented, and more.

You should plan on incorporating and applying for 501(c)(3) status when you are considering a nonprofit. This will allow you to accept donations and apply for grants. 501(c)(3) status also makes the nonprofit exempt from federal corporate income tax while limiting the liability of the directors and officers.

Here are the key steps that are necessary for forming a nonprofit corporation in Alabama:

Choose the Name and Directors

You need to file a name reservation request form with the Secretary of State before you can begin filing the certificate of formation. This is something you should do after choosing the initial directors for the corporation. It’s necessary to have at least three directors on the board for creating a nonprofit corporation in Alabama.

The name reservation certification from the office of the Secretary of State has to be included with the certificate of formation for creating a nonprofit. The name reservation request form has detailed instructions for checking whether the name you want is available or not.

Prepare and File the Certificate of Formation

You would need to file a nonprofit certificate of formation with the Alabama Secretary of State along with a filing fee. The certificate of formation should include the following information:

  • Statement if the nonprofit is not going to have any members
  • Name of the organization
  • Type of organization
  • Purpose(s) for which the organization is being formed
  • Period of duration if the organization is only for a specified period
  • Street and mailing address of the initial registered office with the name of the registered agent
  • Name and address of each organizer for the filing entity
  • Provisions that the incorporators elect for the regulation of the internal affairs of the nonprofit organization. This includes provision for asset distribution on the final liquidation or dissolution. The provisions should not be inconsistent with the law.
  • Number of directors on the initial board of directors with their names and addresses

There is a fillable certificate of formation form for nonprofits on the website of the Alabama Secretary of State. You can complete the form following the instructions provided. You should read AL Code § 10A-1-3.05 and 10A-3-3.02 if you want more information on various requirements.

Additional Specific Language for 501(c)(3) Status

The certificate of formation available on the Secretary of State’s website has minimal necessary information for creating a nonprofit entity in Alabama. It doesn’t include the language needed for obtaining 501(c)(3) federal tax-exempt status from the IRS. You need to include additional specific language with the form for receiving tax-exempt status. This includes:

  • A statement of purpose meeting the IRS requirements
  • Statements that the organization will not engage in any prohibited legislative or political activity
  • Provision regarding the dissolution of assets in which the assets will be dedicated to another 501(c)(3) organization

You can read IRS Publication 557, Tax-Exempt Status for Your Organization, for more information on 501(c)(3). You can work with a proven attorney to understand the necessary provisions and specific language required by the IRS in the nonprofit certificate of formation.

Prepare Bylaws

The next step is to prepare bylaws in compliance with Alabama law. This should be completed before you file the certificate of formation. The bylaws would need to contain the corporation’s rules and procedures for holding meetings, taking care of corporate formalities, and electing officers or directors. Bylaws are internal operating manuals and don’t need to be filed with the state.

Hold a Board of Directors Meeting

The first board meeting is called the organizational meeting of the board. It should take actions, such as:

  • Appointing officers
  • Approving the bylaws
  • Setting a tax year and accounting period
  • Approving initial payments and transactions of the organizations, such as opening a bank account

You should ensure to create minutes that record the actions taken by the board accurately once the meeting is completed. You would need to create a corporate records binder for the nonprofit. This will hold all important documents, including the minutes of meetings, bylaws, and certificate of formation.

Apply for EIN or Employer Identification Number

EIN refers to a unique tax identification number required by a business. You need this number before you submit the applications for federal and state tax exemption. This is a free application that can be submitted online at the IRS website.

Get Local Licensing Requirements

You don’t need to get an Alabama business license for operating your nonprofit. Moreover, you would need to check with local towns and counties about business licenses. This depends on the goods and services you would be offering. Check with the local licensing commission for identifying requirements.

Choose a Knowledgeable Alabama Corporate Attorney

Registering your nonprofit is not as straightforward as it may appear beforehand. You will need to ensure that you remain compliant with all government agencies. Our experienced business attorneys at the BHM Law Group can help you achieve your goals most effectively and provide you with the skilled legal advice you will need in the process. To schedule your free consultation, call us at (205) 994-0902 or fill out this online contact form.