Top Practical and Legal Considerations to Make Before Buying a Business
Without having to worry about things like equipment and inventory, location, finding a base of customers, hiring employees, and unknown market and profitability, buying a business can be a great way to become a business owner. While it may not represent as much risk as launching a new startup, there remains some risk for which anyone looking to buy a business must be aware. If you are considering acquiring an existing company, you should make sure you’re minimizing risk and making a sound decision. Here are some of the top considerations to make before taking the plunge into business acquisition:
· Consider Personal Interests, Talents and Hobbies. You’ll want to invest in a business that you care about, and that you take interest in. Be honest with yourself as to whether it’s something that sounds appealing or trendy, or whether it’s something you really want to live and breath for the foreseeable future. While owning and operating your own business can be the most fulfilling thing you’ll do, it may also be the most demanding and challenging.
· Understand Your Investment. Pinpointing a business that’s for sale, and that’s profitable is not an easy task. Consider why any business is looking to sell, and whether it’s a good investment to purchase.
· Do Your Preliminary Due Diligence. You’ll need to obtain all licenses and permits and contracts, and review them. Look at zoning requirements that may affect what you want to do. Know your market.
· Obtain a Valuation. You need to know what the worth of the business is before you buy it. There are a number of ways to determine a fair and equitable purchase price, and a number of firms that can help you. For more information, read this article: How to Value a Business.
· Draft a Letter of Intent. The Letter of Intent or “LOI” should state the proposed purchase price and terms and conditions of the sale, and be signed by the parties to the deal. A legal professional should help you through this process and draft. There are key provisions you’ll need to consider such as a no-shop clause which may be critical to agree upon before making large expenditures during due diligence and the purchase agreement.
· Provide a Confidentiality Agreement. Before the seller provides you a host of confidential information pertaining to the business, it’s likely they (or their lawyers) will require you to sign a confidentiality agreement. You should expect one, and make sure your attorney reviews and you understand what key terms are being agreed upon.
· Review Pertinent Documents. Through formal due diligence, you’ll need to obtain copies of all contracts and leases, financial statements, debt instruments, tax returns, liabilities, and any other important documents including organizational documents. Then review these carefully with financial and legal counsel. They’ll be on the look out for red flags that may spell big trouble down the road if ignored or overlooked.
· Sales Agreement. Either the seller or purchaser will need to prepare and provide a sales agreement for the sale and purchase of the company. Typically this is called an Asset Purchase Agreement or Stock Purchase Agreement, depending on how the deal is structured. This is the key document that finalizes the purchase and defines everything that will be purchased, including, but not limited to assets, customer lists, intellectual property, and goodwill. It provides critical representations and warranties as to the business and its owners, and it is imperative to have legal counsel engaged in this step.
· Closing. Make sure you have all of the right documents ready at closing, and that everything you need is transferred or assigned. Often at closing, parties will need to sign schedules and exhibits, leases, employment agreements, and the like, and arrange for the wire or transfer of funds.
Buying a business can be an exciting, although daunting process. Expect that the due diligence and negotiation of the purchase agreement may take a significant amount of time and budget for that accordingly. Doing it right can save you tremendous liability down the road, and give you the greatest chance of success as you embark on your new venture.
Ready to take the next step? We’d love to talk with you. Call SK&S partner Christina Saunders at 303-396-0270 or by email at Saunders@skandslegal.com.