Buying a business is an exciting time. However, there are many potential pitfalls that anyone thinking of buying a business should consider prior to submitting an offer. Taking the time to think through these issues helps ensure that the prospective business is stable, and that the buyer is making a sound investment. Although this article discusses a few of the issues that buyers should consider prior to purchasing a business, it is crucial that any potential buyer consult with an experienced business attorney as soon as possible after deciding to purchase a business. A business attorney knows what questions to ask the seller and can help the buyer navigate the many legal issues that can arise during the purchase process.
The Importance of Due Diligence
Before purchasing a business, it is important for a buyer to do his or her homework. This process is called “due diligence”. During this process, a buyer should find out as much information as possible about the business he or she is looking to buy. Having this information helps the buyer make an informed decision as to whether to go forward with the purchase.
The due diligence process should include both a review of the company’s financial information (e.g., tax returns, business appraisals, and other financial documents), as well as the company’s legal information. Initially, the buyer should review the company’s formation documents and other corporate records, such as articles of incorporation, bylaws, a list of all shareholders, and the company’s corporate resolutions. In addition, the buyer should confirm with the secretary of state that the company is in good standing. This initial information will give a buyer an idea of how well the company has kept up corporate formalities, which are important to maintain limited liability once the buyer purchases the company.
In addition to reviewing the corporate records, potential buyers also should complete an in-depth review of the company’s major contracts, customer lists, leases, and employee contracts and benefits. These documents give the buyer a clearer picture of the company’s existing obligations. In addition, potential buyers should review any past and pending lawsuits, which will help identify the company’s liabilities and risks.
A review of the company’s contracts also may help a buyer pinpoint potential hurdles that will need to be addressed prior to the purchase. For example, a review of any leases held by the company will not only help the buyer understand the company’s lease obligations, but also will alert the buyer if the lease requires the landlord’s consent prior to any assignment. A buyer who purchases a business with a lease that requires the landlord’s consent prior to any assignment must get the landlord’s approval prior to purchasing the business. Otherwise, the buyer runs the risk of not being able to operate the business at its current location.
Other important contracts to review are employee contracts. Many business buyers want to keep key employees on after the purchase because these employees can help with the transition, provide stability, and maintain important relationships with clients and vendors. A review of employee contracts, especially key employee contracts, will help a buyer gauge how likely it is that these employees will stay on to help with the transition. It also may alert a buyer to any contract negotiations that may need to take place with these employees so that they will agree to stay on.
Buyers also should determine what licenses and permits they will need to operate the business. Some licenses and permits may be transferable, however, many are not. Buyers should ensure that they have or can obtain all necessary licenses and permits prior to the purchase, otherwise they may not be able to operate the business. An attorney can help a buyer navigate the process of applying for and obtaining any required licenses, including contacting various state and local officials, and preparing and submitting required documents.
An experienced business attorney can help a buyer successfully navigate each of these due diligence issues, as well as others that may arise during the purchase process.
Drafting a Formal Purchase Agreement
Often, once the buyer and seller agree on the essential terms of the deal, they will sign a letter of intent. The letter of intent details the essential terms of the deal. Although the letter of intent should contain the key terms of the deal, it is not all encompassing and will not account for all aspects of the deal. For this reason, it is important for a buyer to negotiate and sign a formal purchase agreement with the seller. This purchase agreement formalizes the parties’ negotiations and details of the deal. An experienced business attorney can help negotiate and draft the specific terms and clauses of the purchase agreement to ensure that it protects the buyer’s interests.
Final Thoughts
Purchasing a business requires a lot of thought and research. There are many issues that buyers should think through prior to making an offer to purchase. This article touches on a few key issues but does not account for every possible scenario that could arise. Anyone considering buying a business should consult a business attorney as soon as possible in the process to help protect their interests and ensure that the business will be successful after the purchase.
Should you have any questions regarding this article or business law in general , please feel free to contact Albee Law PC at (312) 279-0115 or by email at info@albeelaw.com.
