Buying or selling a small business in Florida: what to check first

Buying or selling a small business is often a handshake deal at first. A price gets agreed over coffee, and the paperwork comes later. But the paperwork is where the risk lives: old debts, tax bills, a lease that can't be transferred, or a seller who opens a competing shop down the street. Here is a general guide for Florida, written for both buyers and sellers.

Asset sale or sale of the company?

There are two basic ways to do the deal:

• Asset sale. The buyer buys the things the business uses, such as equipment, inventory, the name, the customer list and the goodwill. The seller's company usually stays with the seller, along with its debts, unless the buyer agrees to take some on.
• Sale of the ownership interest. The buyer buys the owner's shares in a corporation or membership interest in an LLC. The company itself keeps everything it already had, including its contracts, its history and its debts, known or not.

Buyers often prefer an asset sale because it can limit what they inherit. Sellers sometimes prefer to sell the company because it can be a cleaner exit. Each choice also has tax effects. Talk to your CPA about those before you agree on the structure.

Due diligence: what to check

Due diligence means checking what you are really buying, or making sure you can deliver what you are selling. A basic list:

• Debts. Loans, credit lines, equipment leases, unpaid vendors and any lawsuits or judgments.
• Liens. Lenders usually record their claim on business property by filing a UCC financing statement. In Florida, most of these are filed with the Florida Secured Transaction Registry (floridaucc.com). Search the seller's exact legal name. Liens on fixtures are generally filed with the county clerk instead, so check county records too.
• The lease. Many commercial leases require the landlord's written consent before the lease can be assigned or before ownership of the tenant company changes. Read the lease early and talk to the landlord before closing, not after.
• Contracts. Supplier, customer, franchise and equipment contracts may say they can't be transferred without the other side's approval.
• Licenses and permits. Some licenses belong to a person or a specific company and don't transfer with the assets. The buyer may need new ones before opening the doors.
• Employees. Who works there, how they are paid, whether they are employees or contractors, and what is owed for wages, vacation or benefits.
• Taxes. Whether the business has filed and paid its sales tax, reemployment tax and other state taxes. More on this below.

Sales tax: the buyer can inherit the seller's bill

Florida has a successor liability law for state taxes, section 213.758 of the Florida Statutes. In general terms:

• It applies to transfers of more than 50 percent of a business, its assets or its stock of goods.
• It covers more than sales tax. It reaches most taxes the Florida Department of Revenue administers, including reemployment tax, but not corporate income tax.
• The seller must file a final return and pay within 15 days after the transfer.
• The buyer can be liable for the seller's unpaid taxes from running the business, unless the seller gives the buyer a receipt or certificate of compliance from the Department, or the Department audits and finds nothing owed. Either side can ask for that audit.
• The buyer can hold back part of the purchase price to cover the seller's taxes. If it does, the law says the buyer must pay that amount to the state within 30 days after the transfer.

The buyer's liability is capped, and some transfers, such as foreclosures and bankruptcy sales, are excluded. For both sides, the practical lesson is the same: deal with state taxes before closing, and put a holdback or tax clearance step in the contract.

Non-competes in a business sale

A buyer is often paying for goodwill, and goodwill isn't worth much if the seller opens the same business next door. Florida's restrictive covenant law, section 542.335, generally allows a seller's non-compete if it is in a writing signed by the seller and protects a legitimate business interest, such as goodwill tied to the business's name or area.

For a seller of a business or an ownership interest, a court is to presume that a restriction of 3 years or less is reasonable in time and that one longer than 7 years is unreasonable. Those are presumptions, not guarantees. The area and the type of business covered also need to be reasonable. Write the non-compete carefully, and make it part of the sale documents.

Get the deal in writing

A letter of intent or a text agreeing on a price is not enough. The purchase agreement should cover, at least:

• Exactly what is being sold, and what debts, if any, the buyer is taking on.
• The price, how and when it is paid, and any holdback or seller financing.
• The seller's promises about the business (sometimes called representations and warranties), and what happens if they turn out to be wrong.
• Conditions that must happen before closing, such as landlord consent, financing or tax clearance.
• The non-compete, and any training or transition help from the seller.

Escrow and closing

Many sales use a neutral escrow agent, often a lawyer or title or escrow company, to hold the buyer's deposit and the closing money. At closing, the parties sign the final documents, such as a bill of sale or an assignment of the ownership interest, the lease assignment and any non-compete. The money is then released under the agreement. Any holdback stays in escrow until its conditions are met.

Common mistakes

• Agreeing on price before checking debts, liens and taxes.
• Buying the company when an asset purchase would fit better, or the other way around, without asking a CPA.
• Skipping the UCC and lien search, or searching the wrong name.
• Assuming the lease, contracts or licenses transfer automatically.
• Paying the full price at closing with no holdback for state taxes.
• A non-compete that is missing, unsigned or vague.
• Relying on a short letter of intent instead of a full purchase agreement.

This article is general information about buying and selling a small business under Florida law, not legal advice. The rules depend on the facts and can change, and tax questions belong with your CPA. Every deal is different, and reading this doesn't create an attorney-client relationship.