I received an interesting question this week and felt it would be helpful to discuss it on the blog in case you run into a similar situation.

The lesson here is that a good buyer always plays “what if” and exhausts all possible options when a roadblock comes up in your deal (and rest assured that they will – it’s all part of the process).

Question: I am in the midst of a deal and have run into a major problem. The company provides medical supplies and the majority of its clients go through Medicare and Medicaid. After reading your program and being warned about company contracts that may not be transferable I approached the seller. He first said it was not a problem but after pressing him a bit (and thanks to your book), we reviewed the licenses and sure enough, none of the government related contracts/licenses can be transferred or assigned. I like this business. It passes all of the ten commandments in your materials and the deal is fair. The seller and I have met several times and get along well. But I don’t know what I can do now. Is this something that should make me walk from the deal? Please help.

Answer: Let me answer your last question first: NO, you should not walk from the deal.

The good news is that there is a very viable option. The bad news is that your attorney and accountant may initially object but once you layout the deal parameters they can construct it to provide you with the protection you need.

While the preference for a buyer is to almost always have an asset purchase (and it’s the norm in small business purchases), the most viable option is to set up this transaction as a stock purchase so as to avoid having any license transfer issues altogether.

Let’s explore the stock sale option.

By purchasing the company stock, nothing should change in the “eyes” of the license issuer.

However, you will want to double check that there are no other conditions to the license related to a change in ownership. In other words, verify the contract to be certain there are no other conditions on a sale.

The downside is that by acquiring the stock and not the assets, you effectively assume all of the liabilities past, present and future. This is where your attorney will surely disagree. You may also lose some potential tax savings and this what your accountant may disagree about.

On the legal side, you can include certain protections to mitigate, but not completely eliminate, your liability/risk by having the following in place:

Ensure that the sales agreement provides you with bulletproof indemnification by the seller for any potential liabilities that may have occurred during their ownership but only surface after you close the deal.

Include a significant amount of either seller financing or a holdback in the deal so that you will have adequate leverage to make a claim against the seller in the event any are made against the business. If you don’t, you could be faced with defending the claim and also having to go after the seller in a separate suit and when transactions get litigious it is always expensive and never pretty.

Any note or holdback should have a right of set off which allows you to use those funds to settle any claims if the seller does not defend them or provide adequate proof of not being liable.

From a financial perspective you should be aware of the following:

A stock sale is generally better for the seller from a tax perspective as well, while an asset purchase generally favors to the buyer.

This is specifically related to restrictions you will incur on deducting future depreciation expense.

I would suggest that you have your accountant run the numbers of the business under both a stock and asset sale scenario with the goal of outlining what tax consequences you will incur and where the seller may benefit. This can provide you with some additional leverage on the purchase price as well. After all, if a stock sale is the only way the business will likely transfer to a new owner, and doing so will not only add some legal exposure and potential tax losses to you, the seller may have to readjust their thinking on the terms and make some accommodations given the advantages they are gaining. If not, they will likely have a difficult time selling the business to any buyer who does not already have the necessary licenses to operate the business.

Also, the possibility exists for you to acquire both the assets of the company and the stock

(which will include the licenses). I would suggest that you have your attorney outline the options on this front as well.

So there you have it – the deal is not dead. There are options available – there always are. Sure it is possible that an agreement may not be reached but you must exhaust the alternatives. The key is for you and the seller to have a meeting of the minds of getting a deal done and to both make accommodations to achieve that result.

It is especially important that you get your attorney and accountant involved in the discussion and explain that your goal is to find a solution if possible and not to simply broad-brush a stock sale as a “deal killer”.

Naturally, neither party should put themselves in a vulnerable position but with the right mechanisms in place, you can both be adequately protected and not have any reckless exposure.

Read more about deal structures at: http://www.diomo.com/-Deal_StructureQA