Why Should You Buy or Sell a Business?

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A great way to start a new business is to buy an existing one.

However, it’s not always the easiest or fastest process and without proper guidance, you just never know what you might get.

A business purchase usually begins with learning of a business for sale, either through word of mouth, the internet, or a business broker. If you find a business through a business broker, just remember that the broker works for the seller. A good broker will have worked with the seller to get all of the ducks of the business in a row and will be able to anticipate a buyer’s objections.

What steps should be taken when buying a business?

Most of the time, the prospective buyer will first need to sign a non-disclosure agreement (NDA). The seller will be disclosing a lot of financial and proprietary business information and wants to be assured the buyer will not be disseminating the information.

Next, the parties may verbally discuss terms that are memorialized in a Letter of Intent (LOI). The Letter of Intent will lay out things like purchase price, Due diligence would be the first step. Due diligence is a period during which the buyer is given most of the critical information about the business a buyer would need in order to decide whether to complete the purchase or not.

How should you structure a business purchase?

It could be an asset purchase or an equity purchase.

In an asset purchase, only the assets of the business are purchased, not the liabilities. In other words, one would purchase the goodwill, equipment, customer lists and any other assets and put them in their own business entity, such as a limited liability company (LLC) or corporation. Liabilities would be payments due, tax issues, lawsuits or any other financial obligations. An asset purchase can be a great way to buy an existing business without taking on any potential problems. However, an asset purchase should be carefully drafted by an experienced business attorney.

​It’s very easy to overlook important details and indemnification provisions in an asset purchase agreement, so it’s an area that definitely benefits to pay for legal advice. Don’t forget, even if the business broker sends you their form, they don’t represent you and don’t assume you can’t negotiate more favorable terms.

The other way to structure the purchase of an existing business is an equity or stock purchase.

In this instance, the buyer actually buys the entire seller entity. If the business entity were a corporation, the buyer purchases all of the stock to become the new owner. If the seller business entity is a limited liability company (LLC), the buyer purchases all of the membership interest. The downside to an equity or stock purchase of an existing business is that the buyer also buys the liabilities. Any outstanding tax obligations, lawsuits or other issues are inherited by the buyer of the business.

Selling a business?

The sale of a business requires a lot of up-front work to make sure it goes smoothly. First, all of the financials and taxes need to be up to speed. Secondly, all of the corporate documents, such as meeting minutes, incorporation papers, employment agreements and trademarks should all be in order and set up the right away.

​A smart buyer is going to expect a big discount on the business purchase price if any of these issues are not in order. Once the business has all of its legal loose ends tied up, it’s time to find a buyer for your business. This is often someone already familiar with the business, such as an employee, a customer or even a family member. Selling a business to a third party can take more time and effort, particularly in finding a buyer.

Whether you are looking to purchase an existing business or get your current business ready to sell, our business attorneys in center city and the main line can help you.