Tips From Your Lawyer When Buying a Business
- Authors: Selena Filice, Marc Laatu
- Date: September 13, 2022
Buying a business can be both an exciting and stressful experience. The road from the initial discussion to closing the deal can be a long and complicated one. In this article, we cover five tips to make the most of your time and to work effectively with your lawyer so that your deal goes smoothly.
Assemble your “team”
The very first thing you should do, even before you’ve even identified a business that you would like to purchase, is consult with your team of professionals. Your “team” should include a lawyer, an accountant, a lender (if financing is needed) and an agent (if the business is listed). Although it may seem like it costs you more upfront, your “team” will save you many times that amount down the road.
When it comes time to picking a lawyer for your business purchase, they should have experience acting on business purchase transactions and be able to explain each step in the process. You should avoid using the same lawyer as the seller (which is called a joint retainer), as you (as the buyer of a business) have interests that inherently conflict with the interests of the seller. Your lawyer should be looking out for your interests above all else.
In order to avoid any future headaches, discuss your expectations with these professionals for how they will bill you, what it will cost, and when you will communicate with one another.
Know your seller and stay in communication
When you’ve identified a business to purchase, establishing open communication with the seller is key to settling deal terms and disputes directly, without the need for lawyers. Dealing with a seller who is not engaged or inflexible can result in delays and added expenses.
Difficulties may arise and additional costs may add up if the seller’s lawyer is inexperienced, impractical, inattentive, or constantly revising draft documents. Dealing with a seller’s lawyer that is refusing to cooperate will slow the process and could ultimately jeopardize the transaction. If there are any terms that can be settled by communicating with the seller directly, do so ahead of time, but remember that an experienced lawyer will know what to look for and can save you money by helping you avoid unfavorable contract terms.
Get on the same page
When it comes to negotiating the business purchase, most people concentrate on price, but there are many other key deal terms that can cause a deal to steer off track. Settling key terms as early as possible, such as the closing date, availability of financing, key personnel staying on board, landlord consent, whether the seller will grant a non-compete, working capital requirements and adjustments, and due diligence disclosures and timelines, will help the buyer and seller close the deal with the least amount of bumps in the road. Getting on the same page can take the form of a non-binding letter of intent, which can help the parties address these key terms before entering a binding purchase agreement.
Clear hurdles that are out of your control
Our next tip is to get working on any third party consents as soon as possible. Many buyers make the mistake of waiting until they’ve signed a purchase agreement before approaching their lender. You should know what your lender will require and be ready to give it to them right away, such as: a signed a personal net worth statement, company financials, projected cashflows, personal guarantees, signed purchase agreement, and/or an environmental report. Arranging the financing for a commercial purchase with a major bank can take weeks or even months. Locking in your financing as early as possible, even before you’ve identified a business to purchase, ensures that you will be able to capitalize on the right opportunity.
In addition to funding the deal, make sure you engage with the landlord, suppliers, or any key employees early on in the process. Build in sufficient time for these parties to consult with their own lawyers/advisors and start working with them well before the closing date, as they may have their own terms or conditions to agree to the sale .
Do your due diligence!
As a buyer this is your opportunity to confirm the seller’s claims about the business you are buying and identify any issues that might – or should – prevent you from completing the transaction. If you are buying something, especially a business, you should know exactly what you are going to get. The due diligence process is the time period between agreeing on essential terms of the transaction and closing the deal. It is the time period for you, the buyer, to verify all of the key information about the business so that you are comfortable with proceeding with the deal.
Some of the key information you will want to request may include:
- Business financials and tax returns;
- Ownership information;
- Licenses and permits;
- Lease details;
- Inventory and a list of the business’ assets and equipment;
- Key supplier contracts and customer list;
- Employee information; and
- Minute book.
As a buyer, if you anticipate any issues, bring them to the forefront right away. You don’t want to end up with costly oversights that could have been avoided at the start. Some issues that may be uncovered during due diligence include: revenue off the books, unreasonably high accounts receivable, disgruntled employees, outstanding lawsuits, liens against property, shareholder disputes behind the scenes, unpaid taxes, or unfiled tax returns. If due diligence does uncover issues, it is important to consult your “team” about how you want to deal with them. A great question to ask yourself if an issue does arise is, does this problem go to the heart of the business opportunity? If yes, maybe you need to reconsider the deal, but if it is a minor concern to you, maybe it can be resolved by a slight reduction in the contract price, for example.
Depending on the issue, it could take a matter of hours or it could take months to fix a problem uncovered during due diligence. Ultimately, the amount of due diligence that should be conducted will be dependent on the value of the deal, the type of business, the type of deal (asset purchase or share purchase), and your familiarity with the business.
Buying a business can be complicated. While none of these tips will guarantee you a successful purchase, they will increase the chances that your deal will run smoothly and close on budget. If you are thinking about buying a business or have already started the process, get in touch with our experienced team of business lawyers at CARREL+Partners today.
This publication is for general information purposes and is not to be taken as legal advice. The information within is current only to the date of publishing. If you have any questions regarding article content, please contact the author(s) directly.