Buying a Business
Far too many aspiring entrepreneurs buy businesses without proper planning and due diligence. Then bad things happen. There’s usually more risk on the buying side, but sellers can make costly mistakes too.
When buying a business there are many important decisions to make before you ever get to the closing. The firm of CPC Law can be your trusted advisor to help you make the right decisions. Before you can make informed decisions, you need to ask the right questions. We’ll help you understand what you need to know and how to perform the proper due diligence to purchase the right business for you.
A good starting point is to answer the question “why do you want to buy a business?” If you are experienced and have already owned other businesses, that may seem an unnecessary or dumb question. Some cannot work for others and know of no other way than to own their own business. Others have never owned a business and feel ready for a life change. Starting with “why” is always a good way to approach such an important decision.
Are you ready to make the commitment and pay the price (both in terms of cash and time) to be a business-owner? It’s been said that the entrepreneur is the crazy person who works 100 hours per week to avoid working 40 for someone else.
Unless you own a public utility company or legal monopoly, you’re in a competitive business. Everything in the business world is competitive and the majority of new businesses fail. We urge you to check out the business book called the Blue Ocean Strategy, among many other good reads. The idea is to adapt an existing business model in a way where there is no competition.
You would then sail clear blue waters rather than the bloody red waters of competition. Examples described include Cirque du Soleil, which created a new type of circus and Yellow Tail, which brought inexpensive, good wine to the masses without intimidation.
If after doing the necessary soul-searching and confirming that owning a business is the right move for you and your family, the next question should be which business is the right fit for you?
Buying a franchise may be the best fit. There are benefits to a proven, successful “business in a box” with all the systems in place. You can reduce or eliminate many risks when you plug into a proven business model and you’re likely to profit more quickly than starting from scratch.
When evaluating a franchise deal, it’s critical to closely review the franchisor’s agreement and completely understand the terms. These agreements are rarely negotiable and you should expect the terms to be “my way or the highway.” Among the important terms to understand are the buy-in price and financing terms, profit-splitting and ongoing franchise fees, operations requirements for running the business, marketing and lead-generation support, websites and other intellectual property and other issues.
The franchise agreement will likely be a very long and complex document peppered with confusing “legalese.” Would you like a legal expert to help you evaluate it and make this important life decision?
In looking for the right business to own, we recommend building your support team. Working with an experienced business broker is a good idea. The right broker can provide a list of businesses on the market with all the vital data pertaining to each business and provide expert advice. We also urge you to work with a CPA to review the books of the business you’re interested in buying.
Unfortunately, there are dishonest business owners seeking to unload junk on an unsuspecting buyer. During discussions with your prospective seller, the buyer should ask why they are trying to sell the business. You’ll want to know whether there are any problems or issues plaguing the business that makes the owner want to get out that should make you walk away from the deal.
It’s ok to buy a business with flaws if you go into it with open eyes and these defects are factored into the price and terms. The legendary investor and business-buyer, Warren Buffet, talks about the under-valued companies (which he calls the “cigar butts” he finds on the sidewalk) he has bought so he can add or create value.
Typically, when you identify a business you’re interested in purchasing, the potential buyer will deliver a letter of intent (LOI) and sign a non-disclosure agreement (NDA) to begin reviewing private information about the company, including the important issue of its finances. Most sellers will want to see proof of funds (POF) from the buyer to be assured the buyer isn’t simply a “tire-kicker” wasting their time without the ability to close on the deal.
Early on in the process, a buyer will typically submit an offer in the form of a purchase contract. The buyer will usually put down some good faith money to be held in escrow as a deposit. Most contracts will contain a due diligence period during which the buyer will further investigate the business leading up to the closing.
There are several important issues to look out for in your due diligence. You’ll want to know what kind of liabilities the business has, including pending or threatened lawsuits, accounts payable, debt obligations and other pitfalls.
There may also be liens against the business assets that may be found through a public records search. We recommend all buyers to submit a contract offer with an escape clause that will allow them to cancel the deal and get a refund of the deposit if information obtained in the due diligence period makes them want out of the deal.
Let’s discuss some of the legal considerations common to every business purchase. The first consideration is what assets will be bought and sold. The deal could involve the sale of shares of a corporation or membership interests in an LLC. These methods have the buyer purchase the actual business entity. When you buy the company, you become the owner of all of its assets, including inventory, accounts receivables, good will and everything else that gives the business its value.
Another way to structure the deal is for the buyer to form its own company or use an existing entity to buy the assets of another company without buying the seller’s company itself. Real estate is often involved, usually in the form of buying a commercial property or assuming the lease if the seller is a tenant. If the buyer is assuming a commercial lease, that triggers an important sub-set of due diligence involving the terms of the lease and condition of the property.
Financing and debt considerations will likely come into play. This may be in the form of financing a purchase through a business loan, seller financing and taking the accounts payable or assuming the accounts receivable of the business being bought.
There are many more issues to consider and having an attorney to represent you, along with other trusted advisors, like a CPA, can make all the difference between a successful and regrettable deal. Many have learned the hard way that some of the best investments are the ones you never make. That’s why good legal representation can help you close the deals that are right or walk away and cut your losses on the ones that aren’t.
CPC Law will represent you in a business transaction from the initial contract through the final closing. We give you sound advice and sometimes it’s what you need to hear but don’t want to. Far too often, business people want to cut corners and make things simpler than they really are.
They want to avoid expenses such as legal fees and often leave issues unresolved and use online or store-bought contracts in a box that don’t cover all their needs. At the very least, you should have an attorney consultation and measure twice so you only cut once. It’s been said that if you think it’s too expensive to hire a professional, imagine how much it will cost if you don’t.