Most business owners and many lawyers underestimate the nuances of how state and local laws can affect the purchase or sale of business. While many of the laws and legal boilerplate that you might see in a purchase transaction will be consistent across state lines, there are some critical ways in which they differ. Understanding the nuances of these laws is essential in maximizing the value of each transaction.
Below is a brief summary of a few of the unique aspects of buying and selling a business in Colorado:
Colorado is one of only four states that does not provide any kind of sales tax exemption for the sale of a business. What that means, as a practical matter, is that purchasers of businesses in Colorado must pay sales tax on any tangible property involved in the sale.
Unlike in most other states, when buying a business in Colorado, the seller and buyer are responsible for assessing the fair market value of any tangible assets belonging to seller, and then paying normal sales tax on that property.
From a business owner’s perspective, this is a bad law. It effectively reduces the relative value of Colorado businesses with tangible property by the sales tax amount compared to businesses in other states that provide sales tax exemptions. But, bad law or no, it is still the purchaser’s obligation to account for this law and adjust their purchase price, and their expectations on the sale, accordingly.
Non-compete agreements are generally void in Colorado. One notable exception is in the sale of a business. So while your employer cannot generally keep you from competing against them, a buyer of a business can prevent personnel from a selling business from competing against them. “When ancillary to the sale of a business, such covenants protect the buyer’s right to enjoy the business good will for which it paid.” Reed Mill & Lumber Co., Inc. v. Jensen, 165 P.3d 733 (Colo. App. 2006) (citing Gibson v. Eberle, 762 P.2d 777, 779 (Colo. App.1988)).
Non-competes associated with the sale of a business are generally enforceable in Colorado for up to five years, assuming the geographic scope is appropriately limited. Reed Mill & Lumber Co., Inc. v. Jensen, 165 P.3d 733 (Colo. App. 2006).
Of course, the actual length of the non-compete in any transaction is a key item for negotiation. But given the impact of a potential five-year competition restriction, this is a meaningful carrot or stick to be considered in negotiating any business transaction here.
Occupational licensing requirements
What do dietitians, plumbers, and podiatrists have in common in Colorado? They’re all among the hundreds of businesses subject to occupational licensing requirements. Many smart economists and influential thinkers hate such licensing requirements, but like them or not, they can drastically affect your purchase or sale. If you’re an out-of-state buyer, you may not be fully cognizant of which occupations are and which occupations are not subject to regulations. But this is definitely something to consider, regardless of the industry involved in the transaction.
Colorado is also subject to more strict regulations with regards to broker-dealers than most states. Generally, only licensed broker-dealers can assist in the sale of stock or in the sale of a business. There is a fairly broad federal exception to this rule for M&A brokers. But the exception in Colorado isn’t as expansive as the federal exemption. According to this law, Colorado Rule 51-2.1.1B, enacted in 2013, there is an exemption from broker-dealer regulations for:
A person who acts as a business broker with respect to a transaction involving the offer or sale of all of the stock or other equity interests in any closely held corporation or limited liability company … provided that such stock or other equity interest is sold to no more than one person, as that term is defined in the Act.
According to the language of this law, there are a number of actions that might be prohibited here that are likely legal elsewhere. For example, what if a broker assists in a transaction where 51% of the equity interests of a company are sold? The statute only provides an exemption where “all of the stock or other equity interests … [are sold]” (emphasis added). According to the literal language of the statute, this exemption does not apply in those circumstances. If you are involved in a deal where stock is sold and brokers are involved, this is one provision that must be scrutinized carefully. And it is also a notable example of where Colorado law might cause complications for business brokers unfamiliar with local guidelines.
This is true in many states, but in Colorado, lawyers are governed by strict rules that make it difficult for lawyers from other jurisdictions to practice here. Colorado Rule 5.5 provides a strict prohibition for lawyers from outside the state from “practicing law in this jurisdiction without a license to practice law issued by the Colorado Supreme Court.”
While many lawyers are inclined to skirt these rules, it’s a problem for companies to be involved in buying or selling a business here without local counsel to advise them on these nuances.
In sum, whether you’re a buyer or seller, there are many aspects of M&A deals that are common to all fifty states, but there are enough differences in Colorado where it is critical to work with counsel familiar with the details in your jurisdiction.