Steps to Buying a Business
If you’re starting out on the path towards purchasing an existing business, the steps are relatively simple when put in general terms. Below are a few guidelines for the stages.
RESEARCH
This should be the stage when you dig into the company. It is likely you will have to sign a non-disclosure or confidentiality agreement prior to receiving most of the materials as they are private. Look beneath the surface of any broker representations or if you found the business online and read a glowing description of its potential, its time to look for yourself. You need to investigate. We already know you need to verify the financials. You also need to look into the employment issues such as making sure wages and taxes are in order, as well as make sure that key employees will be retained in some manner for the transition of ownership. This would also involve reviewing contracts, leases, and the general assets of the business and their condition (vehicles, equipment).
DECIDE ON WHETHER YOU ARE PURCHASING SHARES OR JUST ASSETS
Depending on your goals and the hassle of transitioning the assets (and contracts, leases, etc.) to a new entity, you are either going to buy the shares (for a corporation) or the membership interests (for an LLC). Generally, a buyer prefers an asset purchase that is specific about the assets purchased and does not agree to any assumption of liability of company debt. If you were to buy shares, you would take over the entire company entity but this would cause you to assume along with the company any liabilities it may have (known or unknown).
DOCUMENT THE DEAL
You should have a price in mind based on the seller’s demand or listing and what you perceive the value to be. After reviewing any due diligence materials such as the taxes and financials, you may come to a different opinion on price. Price is a key term for the purchase agreement. Part of the price negotiation is discussing how the payment will be made, as either a lump sum or in payments. Payments can be by the seller financing in the event the business is of a type that a bank is unlikely to give a loan.
You will want a non-competition agreement in place so that the seller does not decide to compete and re-enter the market for the same business type and become your rival. Typically, there is a non-competition agreement for a period of years in a certain geographic area where the company does business or in its natural zone of expansion.
It bears noting that it is always negotiable which party, buyer or seller, prepares the documents. The buyer will typically send the first document, the letter of intent, to the seller for review and acceptance of basic terms. The terms may or may not be binding, depending on the negotiations. At times there will be agreed exclusivity so that the buyer has time to decide whether to enter the final agreement for purchase and the seller is not actively courting other buyer’s during the due diligence period. The terms in the letter of intent typically are included in the final purchase agreement.
The purchase agreement will include all of the terms of the deal such as the price, payment method and schedule, warranties, representations, property transferred and that which is excluded. The purchase agreement typically also addresses intellectual property such as trademarks, tradenames, logos, etc. In addition, during this timeframe, if there is a franchisor or landlord involved – or really any third party which must provide approval – there will be a contingency that the third party must sign off prior to the deal being final.
If you are looking into purchasing a business, contact me for more information about the key terms and risks to consider throughout the process. You can email from the Contact Us page to set an appointment and typically after getting some basics of the deal, the industry or business type, seller, and other relevant information I can estimate the costs, risks, documents and information needed, and the time the sale could take to close.