Even with the challenges of the coronavirus pandemic, business still continues and new opportunities present themselves every day. Buying an existing business is a common approach to expanding your market share or entering into a new market.
Business purchase transactions – otherwise known as mergers and acquisitions – tend to be complex whether you’re the buyer or the seller. While a seller may be intimately familiar with the operations and finances of a business they’ve built themselves, an outside buyer must take care to do all the proper due diligence before purchasing.
As a buyer, you usually have only a limited time to evaluate and appraise every important factor of the business you’re looking to buy. Once you complete the sale, you become responsible for any liabilities owed by the business you just bought. If you overlook a critical detail or fail to ask the right questions before your transaction, you may agree to a business purchase agreement that ends up costing you more than the sale was worth.
One of the biggest mistakes you can make going into a business purchase transaction is to do it without the help and counsel of a lawyer. Imagine buying a business only to find out a couple of years later that you owe thousands of dollars in back taxes or debt. A business lawyer’s job is to anticipate potential issues that may arise and address them in your business purchase agreement so that you’re covered against these types of unpleasant surprises down the road.
If you’re looking to buy a Philadelphia area business or company, Holmes Business Law can help position your new acquisition for the best possible success. Call our office today at 215-482-0285 to talk to an experienced business lawyer about your options.
How Do You Buy an Existing Business?Buying an existing business involves several steps that may vary depending on the approach you choose to take. Your business lawyer can help you navigate the many decisions you’ll have to make throughout the buying process.
First, you must choose how to structure your deal.
- Do you want to pursue a merger between your company and another?
- Would you like to acquire part or full ownership through a stock purchase?
- Or do you want to just purchase another company’s assets?
This decision will affect the income tax and liability aspects of the transaction. Your attorney can work with your accountant and other tax counsel to figure out your best path forward.
Once you choose the type of deal you want to pursue, you must determine the purchase price that you’ll propose to the seller. Here, you’ll likely have to involve the expertise of business appraisers, investment bankers, accountants, and other valuation specialists at the direction of your lawyer. Based on your bargaining power, liquidity, and risk tolerance, you can offer the seller cash, equity, debt, assets, or a combination compensation package.
Once you’ve determined your strategy, your lawyer will draft a letter of intent (LOI) to present to the seller for both sides to sign. The LOI should cover:
- The purchase price and details of the deal structure,
- The necessary due diligence to move the transaction forward,
- A statement of both sides’ expectations going into the purchase agreement,
- The anticipated date of closing the sale, and
- Any other important terms as discussed by the parties.
Letters of intent cover the tentative terms on which both parties expect to agree. LOIs generally aren’t legally binding, so the terms of the final purchase agreement can change over the course of negotiations. However, some LOIs may be written like contracts, with binding terms. Others can be a combination of binding and non-binding conditions.
Due Diligence Checklist for Buying an Existing Business
The due diligence process involves an in-depth investigation of the company you plan to buy. Every business purchase transaction is unique, but some common considerations include:
- Are the company’s state LLC or corporate filings current and up to date?
- Has the business filed and paid all its federal, state, and local taxes?
- Are there any unfavorable reviews or negative claims against the business online?
- Does the company hold any product patents or trademark registrations for logos or slogans used in the promotion of its goods or services?
- Does the business have solid contracts with important suppliers and customers?
- Does the business have firm leases for all of its operational facilities?
- Are employees prohibited from disclosing confidential company information?
- Does the company’s employment agreement incentivize its employees to stay and stop them from competing with the business or soliciting away any of its clients?
- Are the company’s internal and employee policies current?
- Are the company’s financial statements sound and up to date?
- Is the company currently the subject of any lawsuits or government investigations?
The due diligence process is critical from the buyer’s perspective because you become responsible for all of the company’s liabilities once the purchase is complete.
Failing to properly investigate the company you want to buy could leave you with unexpected financial and legal problems – with costly losses after the fact. Your investigation may even reveal dealbreakers that lead you to ultimately walk away from the transaction.
What Should Be Included in a Business Purchase Agreement?
Your lawyer’s job is to draft a business purchase agreement that accurately reflects the terms of the deal as agreed between you and the seller. The document helps protect both the buyer and seller from legal and financial risks that may come up after the business sale.
Your business purchase agreement should include:
- Restrictive clauses – such as covenants not to compete, confidentiality clauses, non-solicitation clauses, and non-disclosure clauses.
- Liabilities assumed by the buyer – such as any outstanding loans, unpaid vendor invoices, mortgage payments, or accounts payable balances.
- Assumption and assignment agreements – detailing the terms of the sale and how to distribute assets, liabilities, and lease terms between the parties.
- Sale of assets – consented to and signed between the seller and buyer.
Depending on the specifics of the business you’re buying, you could have additional provisions such as training and transition agreements or consulting or employment agreements. These keep the seller on board to help manage the business through the sale.
You may have to file other paperwork in addition to executing your business purchase agreement. That could include updating secretary of state filings, changing the operating agreement, change in ownership forms for franchises, or resolutions authorizing the transaction from an entity’s board of directors or shareholders.
Talk to a Philadelphia M&A Attorney Today
No matter what industry you’re in or looking to get into, buying a business is a major undertaking with a lot at stake. You want to set yourself up for your best chance at success. That means taking stock of a great number of moving parts – financial, legal, and regulatory.
An experienced business lawyer can help you pursue your goals with your best interests in mind. Every business venture is unique. Call the Holmes Business Law Philadelphia office today at 215-482-0285 to discuss your options with a business lawyer dedicated to your vision.