Business Buying FAQ’s

Name: Jeff

Subject: buying into an existing “S” Corporation

Question: I am considering buying shares in an existing “S” Corporation owned and operated by a friend of mind. He has quoted me a figure for the 33% ownership I would be buying and is flexible on payment schedule. What other important “agreements” and “documentation” should we have in place to be sure this good working relationship.

Answer: Jeff: First, Friends, Family and business frequently do not mix. Right now I am representing one member in the disintegration of a family business that is hurting the economics and destroying the relationships of the family. Second, you need to do the same “due diligence” in purchasing any business.

You need at least the following information: 1. 5 year’s tax returns 2. current P&L 3. Listing of machinery, equipment and inventory 4. Listing of debts and potential liabilities 5. Copies of leases and other financial obligations 6. Business projections and budget for the next year.

Your business and tax attorney should help you negotiate the price, terms and most importantly your role and control in the company. Unless it is spelled out in the corporate Buy/Sell Agreement, you may have no right to salary, control, or even a “say” in the business. Also because it is an S corporation, you could be stuck with phantom income (income for tax purposes but no cash.)

Do not sign anything without consulting a good business and tax attorney.

I hope this helps!

Ron Cappuccio
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Name: Patrick

Subject: Proposal

Question: Hello,I work for a small printer that employs about 30 people. I have a strong
relationship with the owner that hired me over 10 years ago. This owner bought
the business from his father and I am fairly certain the business has been paid
for in full. I am regarded as a major piece of the company in the present and
more importantly the future due to the technical capabilities I bring to the
table. I would like to propose to him me obtaining partial ownership, even if
it’s a very minority interest. For the initial proposal, I would like a very
informal deal to suggest to him. Would it be best to negotiate an Equity Sharing
deal? Do I suggest a capital investment on my part? Because of the value in my
day to day position, I would like to continue my current position and salary at
the same time. What is typically done in this scenario? I’d like the initial
offer coming from me to be attractive to him but not be harmful to me at the
same time. Thanks for any advice you can provide. If you would like more detail,
I would be happy to supply.

Answer: Patrick, why do you want ownership in the business? Do you want more income by sharing
the profits? Do you want gain on the sale of the business? Do you want the right
to buy the business? Your goals will determine the approach.

If you are primarily concerned with more income based upon your contribution to
the company, “phantom stock” may be the solution. This is where you are given
rights to share in the business profits without actual ownership. Phantom stock
can also be used to calculate a percentage of the sales price to be paid to you.

If you eventually want to buy the company, you may want actual stock and
certainly a buy/sell agreement.

Remember, as a minority shareholder of a business you may have only minimal
legal rights. These will be spelled-out in the shareholders’ agreement. You need
a good tax and business attorney to negotiate for you and to prepare the
documents.

I hope this helps!

Ron Cappuccio
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Name: Sean

Subject: Investor Agreement
Question: Ronald, I am currently negotiating the purchase of an existing business. The transaction involves buying both the business and the property. My friend, who is a successful business owner in the same industry, has offered to procure the money for me.

My question to you is what type of terms should I include in our agreement? My biggest concern is being able to phase him out or buy him out after a short time. (I would be operating the business. He would basically be a silent partner.) Any ideas? Thank you in advance for your help!
Happy Thanksgiving,
Sean C.

Answer: Sean: Is your “friend” actually lending or investing the money in the business or is your friend simply helping you get the money. If it is just a procurement arrangement, the friend could get some type of broker or finder’s fee. If it is an investment then your friend will probably want equity.

Usually, I have clients set up a separate LLC to purchase the real estate and one for the business. Your friend could have an interest in the real estate LLC but not in the operating LLC. This would give a safer investment for your friend and avoid control issues.

I deal with many business disputes and breakups in my practice. They are usually bitter. Therefore, I recommend avoiding partners and “entanglements” as much as possible.

You should meet with a good tax and business attorney to help you negotiate right from the beginning. Don’t try to structure the deal without counsel because you will end up making it harder.

I hope this helps!
Ron Cappuccio
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Name: Benson

Subject: Effect of debt when selling the business

Question: I am in the process of selling a small business. The business is
profitable, but it also has a small amount of business debt. This business debt
unfortunately is co-mingled with some personal debt. The overall amount of this
debt is well below the value of the business, and I will pay off all of the debt
with the money received from selling the business.

If this debt is co-mingled with personal debt, do I have to disclose the debt
during negotiations, or is it sufficient if I tell the buyer that the business
does have a minor amount of debt related to start-up expenses and that I will
pay the debt off in full with the money from the sale? It seems to me that it
should be treated like an existing mortgage when a homeowner is in the process of
selling a home. The amount of debt shouldn’t matter, and doesn’t affect the
value of the home (or business), as long as you are not passing on the debt to
the buyer, correct? Any help or guidance would be greatly appreciated.

Answer: Benson,Thank you for the question. The answer is simple – “honesty is the best policy.”
Any buyer that is represented by experienced counsel would discover the
obligations during the “due diligence” phase of investigating the business.
Frankly, the debt may be a positive factor because the bank payments can be
factored out by the buyer when determining the return.

I hope this helps!

Ron Cappuccio
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Name: Michelle

Subject: 90 day option

Question: Thank you for sharing your wealth of knowledge. That is a blessing to
those of us starting out. I have a unique opportunity to develop a recreational
hub on one of the last developed island on the south coast. Homes now selling
for the $200,00 are expected to rise as high as $1,000,000. with in the next 10
to 15 years. Condos and hotels go up left and right, but currently entertainment
and recreation are sporadic and dull. I am working on securing land at the tip
of the island for a recreational hub. I will be using it to handle rentals and
give space to the visitors bureau. I do not want to reveal my whole plan to the
leasee until i have completed a few more steps in my business proposal and
secure capitol. What do you know about a 90 day option? Does it allow me to
assume the property as if i were going forward to start to secure sub leasers?
Can it help protect me as I share my plan? Thank you again for your time.

Answer: Michelle:

Options to purchase are quite common in real estate transactions. Usually, the
option is given so the buyer can perform a “due diligence” investigation of the
property without being committed to buy. This locks in the price and terms for
the parties.

Frequently, a deposit is made for the option and after the option is exercised,
an additional deposit is made. The Agreement will typically provide for
development, environmental and financing contingencies.

Before you go too far in negotiating the agreement you definitely need an
experienced attorney practicing in the area. The attorney should have experience
in land use and real estate development. Most importantly, the attorney should
know the “players” in the community because politics and connections play a
major role in commercial development.

I hope this helps!

Ron Cappuccio

I deal with many business disputes and breakups in my practice. They are usually bitter. Therefore, I recommend avoiding partners and “entanglements” as much as possible.

You should meet with a good tax and business attorney to help you negotiate right from the beginning. Don’t try to structure the deal without counsel because you will end up making it harder.

I hope this helps!
Ron Cappuccio
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Name: Michael

Subject: Buying/Investing into an established “C” Corporation

Question: I’ve been consulting with an early stage “C” Corp in the service
business and recently we have discussed the potential of me buying/investing
into the company as a third owner/shareholder. How do I determine the value of
one third of the business to set/agree on an appropriate level of investment?

Answer: Michael:

I wish I had a “magic formula” for valuing a business. Unfortunately an accurate
formula does not exist.

You have provided four items of information that affect the price:

1. This is an “early stage” business. That means there is probably not much in
the way of good will or ongoing concern value.

2. This is a “service business.” That means there is probably a low value in
machinery and equipment.

3. This is a “C” corporation. That means the founders of the business either set
it up without appropriate legal help or they refused proper advice. Under most
circumstances, a service business should be a Limited Liability Company or an
“S” corporation. Both are pass-through entities for tax purposes.

4. You would be a 1/3 owner. This means you would be a minority owner and would
need a strong buy-sell and shareholders’ agreement to protect your rights. As a
minority shareholder the value of your stock is worth less than if you were in
the control block.

My conclusion is the business is probably not worth much at this stage but you
need good legal counsel to guide you!

I hope this helps!

Ron Cappuccio
___________________________________________________________________

Name: Doug

Subject: “Buying into” a business

Question: Hello,

I am asking this question for a member of my family. They are interested into
“buying into” a small business; in short, their aim is to invest 50-75K into a
currently operating small business with a constant return. They hope that a
portion of profit that the business draws in acts as this “constant return”.

In a way, it is like a simplified corporate bond. They do not wish to take an
active role in management, and I believe they may not like the idea of being
financially responsible within an LLC or as a partner. They have no wish to
establish or run a business themselves.

I have suggested a peer to peer loan at a set interest rate and payment schedule
at one year or less (as opposed to three or more). They are not entirely excited
by this idea.

What do you recommend?

Thanks!

Answer: Doug:

Tell your family member to look elsewhere for a “safe” investment. Most small
businesses fail. Even if this business turns our to be successful, unless your
family member is going to take an active role in the business, he could be the
subject of a “squeeze-out.” This technique is varied, but the active owner can
simply raise his own pay and benefits and not pay your family member.

I suggest an investment with more protection. Nevertheless, if your family
member is insistent upon the investment, make sure he has a good tax and
business lawyer to negotiate and represent him in the entire transaction.

I hope this helps!

Ron Cappuccio

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Name: Les

Subject: Goodwill

Question: I have a client that has purchased a business (Dentist business) and
there was a substantial amount paid for Goodwill and Goodwill Covenant. Since
the intangibles cannot be depreciated what can we do to obtain a tax break?

Thanks!

Answer: Les:

Internal Revenue Code Section 197 provides for a 15 year amortization for
intangible assets in a business acquisition. In addition, you can look for one
year deduction on the acquisition of new business equipment purchased
separately. Frankly, it is best to have a tax and business attorney review the
transaction BEFORE documents are signed!

I hope this helps!

Ron Cappuccio

___________________________________________________________________

Name: Pete

Subject: Selling my busienss – urgent!

Question: Hi Ronald,

I’m a financial planner with a large financial services company. I’m an
independent contractor who owns 100% equity in my “business” (that is, my client
list). I’m selling my practice now, and though I started off specifying one
up-front payment with no strings attached for me, I’m now considering a higher
offer that would be paid out in three installments over two years.

Not having done this before, I’m wary about a stup like this, though I know it’s
done all the time. I still would have no commitment or involvement after the
initial hand-off of all clients, but I would feel a little less at ease not
having all the money in hand up front. Still, I don’t know if my preference for
up-front money is worth taking much less of a total.

What do I need to do to make sure I get paid? (as much as I can do, anyway) –
orignally I was just going to use a template provided by the company for the
contract, but should I now consider an attorney? If I had to sue to get my money
down the road, how much would that cst me? What are the precedents?

Thanks for any help!

Peter

Answer: Peter:

Immediately hire a Tax and Business lawyer! Do not try to use some form or
template. It will not do what you need.

Your agreement of sale should require the buyer to have a promissory note,
security agreement, pledge agreement (for stock or LLC membership interests) and
a personal guarantee of the buyer and the buyer’s spouse. Further, you should
demand a subordinate mortgage on the buyer’s home.

It is normal for deals to have payouts over time. As long as your security is
set up right, you should be okay.

I hope this helps!

Ron Cappuccio
________________________________

Name: Dan

Subject: Buyout Question

Question: My wife is a 1/5 owner of a small business. She wants to get out and is in the early stages of negotiating a buyout. She has decided at this point not to get
an outside lawyer or an independent valuation of her share of ownership, which she was advised to do. There is an offer on the table right now of 125K, tax
free. My wife has K-1s from 2007 that show that she has a stock basis of approximately 225K. I think the fact that they are trying to buy her out for an
amount less than she has in these capital accounts is a clear indication that they are not being fair with her. Would you concur? The business has significant real estate holdings as well as a robust revenue stream and few debts.

Thanks in
advance.

Answer: Your wife obviously needs a tax and business lawyer to advise her.
Anything you say will only impair your relationship with your wife. The best
thing to do is to let your wife make her own decisions (since she won’t listen
to you anyway!)

I hope this helps!

Ron Cappuccio
_______________________________

Name: Youngjoo

Subject: re;joining existing business as a partner

Question: My friend wants to expand her existing business and wants me join her
business as a partner. She is planning on moving to a bigger store in the same
shopping mall. Since she still got 6 month contract left, she said she had to
carry the left over contract without changing business condition(such as
business name, owner’s name, and etc.). If we go on partnership, how does this
one work without forming partnership legally? I’m expected to contribute a
exactly a half amount of the cost of business, but legally my name would not be
shown. How can I protect myself if I join this partnership in this case?

Answer: You need to be part of the business. First, the business should be a
limited liability company or corporation. You need a Buy-Sell Agreement to
address ownership and control issues. This is way too complicated for you to do
on your own. Please hire a business lawyer right now!

I hope this helps!

Ron Cappuccio

___________________________________________________________________

Question:
===========
Category: Business Law
Location: NJ
Subject: Floating LLC

Myself and 1 others formed an LLC
for Skateboards in NJ. he provided
half the funding and I have done
everything else.

The operating agreement indicated
that my percentage of the LLC was
to be 50%. and him 50%
also capital contributions
me 5,000 him 10,000

Now it’s almost 2 months later and
agreement was never signed because
personal isuses

The reason for this is a little
complicated but the bottom line
question is this:

How does the law view unsigned
undated unexecuted agreements
between parties?

and im am trying to continue the
company but i have know idea how
to get him out of the LLc

===========
Reply:
===========
Category: Business Law
Location: NJ
Subject: Re: Floating LLC

Setting-up a Limited Liability Company has many business and legal issues. When
you went to establish the LLC, you and your fellow member should have had
representation by a good tax and business attorney. That would lessen the
likelihood of the probems you now face.

You essentially have 3 options:

1. You and the investor agree that one will buy the other out; or

2. You simply stop working and force the other investor out; or

3. You go to court.

The fastest and cheapest method is to come to a solution to buy out your
partner. You should immediately engage a tax and business attorney to help you
straighten-out this mess.

I hope this helps!

Ron Cappuccio
_____________________________________________
===========
Question:
===========
Category: Business Law
Location: FL
Subject: Customer List

I own a small tech franchise and was the first to open in my state. The
franchisor said I could service customers outside my territory so long as no
other franchise owned those zip codes. A new franchise has opened in some zip
codes that I used to service. Can the franchisor now force me to turnover my
customer list to the new guy for FREE?

Importantly, my contract doesn’t say anything about this; it just says I have to stay out of another franchisee’s
territory. Fine. But the franchisor issued a policy after I bought my
franchise saying that we have 90 days to turnover our customer lists to new
franchises. It’s totally silent on whether we get paid. I didn’t even know
about this policy until last week, when the new franchise owner sent me an email
about getting my customer list.

My contract also says I have to receive ”actual” notice of new policies. I don’t think posting on the website
constitutes ”actual” notice. This customer list is my most valuable asset! and I don’t expect to fork it over for FREE! I’d welcome any advice/suggestions on how to handle this issue. Thanks much.

===========
Reply:
===========
Category: Business Law
Location: FL
Subject: Re: Customer List

Franchise Agreements are contracts. Both the Franchisor and Franchisee are bound
by the contract. In order to determine your rights and obligations, you need a
good business atorney to read the Franchise Agreement and documents.

You may have to turn over the information (leads outside the territory.) On the
other hand, you may have rights to compensation and the Franchisor may have to
offer the territory to you.

You need to get a good business lawyer to review this is detail and to help you
make your business more successful.

I hope this helps!

Ron Cappuccio

_____________________________________________

Name: Rodger

Subject: Buying into a business

Question: I have been offered the opportunity to buy into a small business. As
of now the offer is a profit sharing plan that will go toward sshares of the
business, and down the road will place ownership in my hands. This is all new to
me, and I do not want to pass on an offer like this. I am unsure how this works,
and am wondering what my best option would be.

Answer: Buying into a business is much different than buying a house. You need
expert tax and legal help right from the beginning BEFORE YOU SIGN ANYTHING!

First, you should have access to the core business documents:

LLC or Corporation Records;

Current P&L;

Tax Returns;

Listing of A/R and A/P;

Lease for Property.

If the business looks to be worthwhile, you should consult with your tax and
business attorney to help you negotiate a Memorandum of Understanding and
eventually an Agreement of Sale. Obviously, you are going to want to address not
only the business and profit issues, but also control of the business.

I hope this helps!

Ron Cappuccio

_____________________________________

Name: Rodger

Subject: Buying into a business

Question: I have been offered the opportunity to buy into a small business. As
of now the offer is a profit sharing plan that will go toward sshares of the
business, and down the road will place ownership in my hands. This is all new to
me, and I do not want to pass on an offer like this. I am unsure how this works,
and am wondering what my best option would be.

Answer: Buying into a business is much different than buying a house. You need
expert tax and legal help right from the beginning BEFORE YOU SIGN ANYTHING!

First, you should have access to the core business documents:
LLC or Corporation Records;
Current P&L;
Tax Returns;
Listing of A/R and A/P;
Lease for Property.

If the business looks to be worthwhile, you should consult with your tax and
business attorney to help you negotiate a Memorandum of Understanding and
eventually an Agreement of Sale. Obviously, you are going to want to address not
only the business and profit issues, but also control of the business.

I hope this helps!

Ron Cappuccio
_________________________________________________________________________

Name: Bruce

Subject: How to structure existing LLC taking on an investor

Question: We are an existing cellular company that has been operating for two
years as an independent agent for two carriers. The business has been
profitable but never took off due to financial constraints. We were under
funded from startup.

We are interested in buying into a franchise that can assist in taking our
business to the next level. The problem is funding. We have exhausted all of
our capital into the existing business and will need a financial partner or
investor to assist in the conversion. We have assets that we will sell to
assist in the initial financing but this will only account for approximately 25%
of startup. The existing LLC also has an unsecured open line of credit to
contribute.

Our goal is to bring in a passive investor. The questions I have are:

– How do we structure the existing LLC?
– What do we offer the investor in terms of return, ownership, etc?
– What type of exit strategy is common to offer the investor?
– Will a lawyer help in structuring the terms or just write up the paperwork
with the terms that are provided?

Thanks in advance for your help and advice.

Regards,
Bruce C—-

Answer: Bruce:

“Passive” investors can be real trouble! If the business is doing well, they
want their investment and usually a salary or other “spiff.” They also
frequently want to get involved and control the business. Amazing, if the
business is in trouble the investor want their investment and usually a salary
or other “spiff.”

If you cannot get an active investor who will contribute to the business
operations as well as provide capital, you may be stuck with an investor.

Here are answers to your specific questions:

– How do we structure the existing LLC?

Answer – you will need a revised Operating Agreement and Buy/Sell Agreement
– What do we offer the investor in terms of return, ownership, etc?

Answer: More, more, more! The investor always wants more. The LLC is a good
vehicle because it is a pass-through entity like an S corporation, but allows
you to have different classes of membership interest. The investor could receive
a guaranteed return but be excluded from control of the LLC.

– What type of exit strategy is common to offer the investor?
Answer: Usually an annual return and a promise to buy out their shares for the
FMV or far more than the Buyer invested.

– Will a lawyer help in structuring the terms or just write up the paperwork
with the terms that are provided?
Answer: A good tax and business attorney seasoned in business transactions will
help structure and negotiate the terms of the agreements. This requires the
expertise of a serious attorney with significant experience!

I hope this helps!

Ron Cappuccio
_________________________________________________________________________

Name: Bruce

Subject: How to structure existing LLC taking on an investor

Question: We are an existing cellular company that has been operating for two
years as an independent agent for two carriers. The business has been
profitable but never took off due to financial constraints. We were under
funded from startup.

We are interested in buying into a franchise that can assist in taking our
business to the next level. The problem is funding. We have exhausted all of
our capital into the existing business and will need a financial partner or
investor to assist in the conversion. We have assets that we will sell to
assist in the initial financing but this will only account for approximately 25%
of startup. The existing LLC also has an unsecured open line of credit to
contribute.

Our goal is to bring in a passive investor. The questions I have are:

– How do we structure the existing LLC?

– What do we offer the investor in terms of return, ownership, etc?

– What type of exit strategy is common to offer the investor?

– Will a lawyer help in structuring the terms or just write up the paperwork
with the terms that are provided?

Thanks in advance for your help and advice.

Regards,

Bruce Capobianco

Answer: Bruce:

“Passive” investors can be real trouble! If the business is doing well, they
want their investment and usually a salary or other “spiff.” They also
frequently want to get involved and control the business. Amazing, if the
business is in trouble the investor want their investment and usually a salary
or other “spiff.”

If you cannot get an active investor who will contribute to the business
operations as well as provide capital, you may be stuck with an investor.

Here are answers to your specific questions:

– How do we structure the existing LLC?

Answer – you will need a revised Operating Agreement and Buy/Sell Agreement

– What do we offer the investor in terms of return, ownership, etc?

Answer: More, more, more! The investor always wants more. The LLC is a good
vehicle because it is a pass-through entity like an S corporation, but allows
you to have different classes of membership interest. The investor could receive
a guaranteed return but be excluded from control of the LLC.

– What type of exit strategy is common to offer the investor?

Answer: Usually an annual return and a promise to buy out their shares for the
FMV or far more than the Buyer invested.

– Will a lawyer help in structuring the terms or just write up the paperwork
with the terms that are provided?

Answer: A good tax and business attorney seasoned in business transactions will
help structure and negotiate the terms of the agreements. This requires the
expertise of a serious attorney with significant experience!

I hope this helps!

Ron Cappuccio
__________________________________

Name: Bruce

Subject: Financial investor

Question: Mr. Cappuccio,

First of all, thank you for your recent advice on how to structure our existing
LLC for a potential investor. I have one other question that I hope you are
able to advise on. We have consulted with a local attorney and accountant that
have both suggested looking at international investors. We are located in
Naples, FL which is a tourist area to many Europeans. The lawyer and accountant
have European clients that have capital to invest into U.S. based companies who
are seeking E2 Visa’s to spend more time in the U.S.. According to the lawyer
and attorney international investors interest is in the E2 Visa and has little
interest in the business. This would be ideal for us as I don’t want to lose
control of how the business operates when bringing in an investor. However, I
am getting mixed opinions on this idea from family and friends. I am hoping
that you may have some experience with international investors and advice to
offer.

Thank in advance,

Bruce C—–

Answer: Bruce:

An international investor can be good. My experience is that many Europeans are
used to the much slower and more convoluted laws for businesses and have
difficulty in believing US business laws are so expeditious. Also, I have never
known them to be “hands off.”

Secondly, I think it is great that your advisers have these international
clients. Nevertheless, that creates a fundamental conflict of interest. How does
he get paid? To whom is he most loyal? If you want to proceed, you should get a
separate attorney to protect your interest in the negotiation with the investors
and setting-up the deal.

I hope this helps!

Best,

Ron Cappuccio
____________________________________________

Name: anna

Subject: no buy out agreement

Question: I am a co-owner of a new personal service agency. We have only been in
business for a year. It has grown by leaps and bounds, with revenue running at
approx. 1 million, and we both have split the profit and have made $100,000
each. My partner has gotten greedy now and told me she doesn’t want me as a
partner. How do I figure out what the business is really worth. I am willing to
sell out to her, but I want a fair price. she is getting hard to work with now
and I am ready to go as fast as possible and start over. We have no buy out
agreement so I am really lost on what I can/can’t do and how to get a value of
the business. Since it is a new business we haven’t got any history to go on,
but I see it growing even more in the second year.

Answer: It is really hard to value a new closely held business. You did not
state the exact nature of the business, but a service business typically has
minimal assets. The customers, employees and set-up, also know as the “going
concern” value are quite important.

In order to be fair to both of you, your agreement should include a provision
for a % of the profits for the next several years. This will help you if the
business continues its success without you.

Your business and tax lawyer should negotiate for you and prepare the Agreement
of Sale. Your partner will probably want a covenant against competition.

I hope this helps!

Ron Cappuccio
____________________________________________

Name: Hyer

Subject: selling business

Question: Hi, I’m not sure if you specialize in this kind of question but here
goes;I’m thinking of selling my Used Vehicle business and I only wish to rent out the
building (not sell it) but I haven’t a clue how I should go about handling the
transaction as far a do I need a lawyer or can I make a contract. I also need
to know how I would put a price on my business. And any other information you
can contribute would greatly help. If you aren’t able to answer my questions,
maybe you can refer me to some who can.

Thank you in advance

Answer: Of course you need a lawyer! A good tax and business lawyer will help
you evaluate your business, structure the transaction, prepare the Agreement of
Sale and all of the necessary documents to protect you. This is a totally fact
specific matter. You need to hire a lawyer right away!

I hope this helps!
Ron Cappuccio