Closing Business and Starting New

[Talmid987]

I have searched but have been unable to find any clear advice on this topic from the internet or this forum that directly applies to my situation...

I have been recently offered an opportunity: to going into a business with a friend after he closes his current business. His business has been very profitable, but the owners (except him) are tired. They are almost completely out of debt

Old Business = BusA , New Business (Us) = BusB

Some ideas, we would like to:
1) Continue offering one of the services that BusA offers; firewall protection (not all of the services; just one to continue bringing in revenue and keep customer base)
2) Transfer (or buy) all of the customers from BusA that use the service mentioned above
3) Continue using all of the employees from BusA.
4) Use some of the final revenue from BusA to transfer to BusB for startup expenses. All debts will be paid for in BusA (we are not moving money to prepare for bankruptcy or anything)
5) Transfer (or buy) all of the existing equipment from BusA


It will be a very different business. The firewall service offered wasn't part of their main business plan in BusA, they began to offer it as a side-service. But it fits more in-line with our new business model. BusB will be offering a completely different service than BusA, eventually.

At the end of the day, all debts will be cleared with BusA. But my concern is this: There was recently a lawsuit filed against one of their vendors. There is potential for BusA to be sued, by default, not due to their negligence (it's just a thought, there isn't a pending lawsuit or any solid leads that I know of). Opening up this new business with him, I do not want the suing company to feel that he closed his business to prevent being sued, and begin to attack the new business (due to us having the same employees, some of the same customers and services, equipment, etc). I want to get as much information as possible to ensure a solid foundation for the new business, and I don't want to have the fear of being sued hanging over my head from the beginning.

Any and every bit of advice is greatly appreciated. If you need any more information, please let me know. I'm eager to know what you guys think.

[Fulcrum]

That possible lawsuit is a big red flag, even possibly with an indemnity clause. Out of curiosity, how is it that BusA can be sued for something one of their vendors did (unless there was some sort of partnership agreement)?

[Talmid987]

BusA is is providing a product supplied by their vendor (a physical object), and BusA is charging the monthly service fee to keep this active; similar to how Comcast provides boxes and cable TV service. If a customer is unhappy with some aspect of the box (based on prior expectations), he can sue the manufacturer of the box, and may even sue Comcast. I don't have any details other than that... Sorry.

The business has been running for a long time without a solid partnership agreement. They do great business, and offer services for an amazing price, but some of the structure wasn't exactly in-tact the way I think it should be. But I hope this answered your questions

[Talmid987]

No more responses? My main question is whether there is an easy way for us to protect ourselves down the road, by making sure the business isn't too similar to the last. Let me know if I'm not making any sense

[Freelancier]

A "true-ism" to remember: Anyone can sue for anything. Doesn't mean they'll win, just means that they can sue.

If you're worried about lawsuits, start with an attorney to advise you on how best to protect the new business. And make sure you get all kinds of liability and E&O insurance.

My take -- NOT an attorney -- is that if you structure this right, you can buy the assets (existing customers and equipment) and goodwill and start the new business. You can buy their cash on hand with a promissory note or an equity stake, but that just extends your entanglement, so maybe that's not the best idea.

I wouldn't buy the employees outright, but let them interview. That way if you want to let any of them go, you're not hung with the unemployment cost.

Set up the new company with a different set of owners and it's a different company. Doesn't matter if you do the same thing, just matters if you get the structure different enough AND that you pay a reasonable market value for the assets from the other company.

Once the existing company no longer has assets to dispose or employees to pay, use the cash on hand (from that company only) to pay off debts and shut down the company. If you leave a promissory note out there, then you have to wait until that gets paid to close the company, so that's another argument against doing that.

[Paul]

I agree with freelancier. Sounds like should be a fairly simple asset sale. Don't actually transfer ownership of the entity. Check with a lawyer BUT you may want to leave the customer that is suing behind (and any other potential problem customers) with the old entity and stop servicing them. That should cut off any connection to the law suit problem.

[Talmid987]

Great input from both of you. Thank you very much. That's exactly what I needed to know!