Issues to Consider when Buying a Business


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If you are thinking of buying your first business or perhaps merging with another company, there are many important factors that you need to consider before getting started.  The following are some, but certainly not all, of those factors.  In order to ensure that you have considered all the relevant issues, you should always consult with an attorney experienced with business law transactions, as well as a certified public accountant (CPA).

1.         Start with a well-drafted purchase agreement.  Be careful make the mistake of pulling a contract off the internet and thinking it will work right for you and the business you want to purchase.  Contracts need to be tailored to meet the factual and legal needs of a client buying a specific business in a specific state. Laws are different in each state, and also change on a regular basis.  Industries have different challenges, legal constraints and operational needs.  Moreover, you need to receive comprehensive written representations and warranties from the seller about what you are (and are not) buying.  Be careful to have representations and warranties that are specific to the business you are buying. In addition, you need to have the ability to back out of the deal (typically called contingencies) if you discover new facts or circumstances.  You should not be locked into buying the business too early in the process.

2.         An asset purchase is always preferable.  The purchase of a business should always be structured as a purchase of the assets of the business, not the ownership interests of the entity (e.g., corporate stock or LLC interests).  While there are a few exceptions, a stock sale is nearly always not the best thing for the buyer.  There is a much greater risk of assuming unknown liabilities and claims against the entity.  Those liabilities may not be disclosed by even the most diligent searches.

3.         Professional reviews.  Have financial professionals look over the seller’s financial statements, the assets to be purchased, important contracts to be assumed, and the books of the business, to make sure all is as you expect it to be and that you have comprehensive understanding of the business.  A certified public accountant (CPA) should consult with you on tax and financial issues related to purchasing the business even before you sign the purchase agreement.  The CPA should also review all of the seller’s financial statements.  You should also consider engaging an appraiser to conduct a comprehensive valuation of the business.

4.         Protect your business for the future.  Insist on a non-competition agreement, non-solicitation agreement and agreement on training or consulting from the seller and key persons following the acquisition. Regardless of your own experience in the industry, there are issues unique to each business that only the seller will know.  Moreover, you do not want the Seller or other key people setting up a competing business in the same town or area.

5.         Retain the existing customers and clients.  Make sure you have a good understanding as to how you will retain the existing customers or clients.  Meet with customers early on in the process so you get to know them and their needs.  The seller should agree to participate in this process.  Also, try to lock in key employees to stay with the business after the sale.

 

6.         Be careful with assumed liabilities.  You and your attorney should ensure that you are not assuming all of the liabilities of the business, especially unpaid taxes, accounts payable and loans.  The agreements should clearly provide that you are not assuming any liabilities unless they are specifically negotiated.

7.         Engage the services of a knowledgeable and competent attorney.  Make sure that an attorney (who is very experienced in corporate and business transactions) is doing the usual and necessary work to close the purchase of the business, including ordering lien searches, tax certificates, document drafting, liability payoffs, and lender coordination. In reality, very few attorneys have the experience and legal knowledge to properly negotiate and close a corporate or business transaction.  Attorneys who only handle other types of legal work, such as litigation or real estate, will not have the expertise necessary to handle the transaction properly. 

In conclusion, while buying a business can be stressful, you can make the experience far safer and pleasant by relying on professionals and your own good business judgment. While the time and cost to take these prudent steps may not seem like your highest priority, it may just be one-tenth of the time and cost you will spend trying to clean up the mess you purchased if you do otherwise.



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