May 10, 2019

What You Don’t Know (But Need To) Before Buying A Business

by Bradley Miller, Miller Law LLC

Buying a business is the biggest purchase many people make during their lives, and it often has long-term implications for their entire family. That’s why it is important to not go into the process blind. Here are some things you need to know as you begin the journey.

1. There are two types of sales: asset sales and stock/interest sales. In an asset sale, you are just buying the assets of the business. You can pick and choose what you want and leave what you don’t. In a stock/interest sale, you are buying the entire company, warts and all. While a buyer often prefers an asset sale, there are various factors that go into deciding which type of sale structure is going to be best.

2. A good letter of intent can make the deal go more smoothly. A good LOI will list out all the issues that are important to you as the buyer. This may include a description of exactly what is being purchased, the purchase price and payment terms, timing considerations for the transaction and a seller exclusivity provision. While having some flexibility is important, the more terms that you and the seller can agree to up front, the less negotiating that will need to happen later.

3. Proper due diligence is important. Due diligence is the research that you do into the business. Many buyers look at the business’ financials and its operation, make their offer and then call it a day. However, that pre-deal due diligence is just the beginning. Skeletons can be hiding in various places, many of which you won’t have access to until after an LOI has been signed. As the buyer you don’t want surprises, so the more you know about the business before getting the keys the better. You also can’t just rely on the statements from the seller without doing your own research. The time and cost to fix a problem later will far outweigh the time and cost of conducting proper due diligence.

4. You as the buyer can be held responsible for certain liabilities of the seller. Even if you are just buying the assets of the business and are expressly not taking its liabilities, you can still end up on the hook for certain liabilities. If the seller has outstanding employee withholding or sales tax, or unresolved unemployment or workers’ comp issues, for instance, these can be imputed to you as the buyer. Proper due diligence will find potential issues like these so you can have the seller resolve them before the closing.

5. Despite everyone’s best efforts, the transaction will take longer than you think. Deals take time. Putting together and negotiating all the necessary documents takes time. Proper due diligence takes time. Obtaining funding takes time. Remember, you are dealing with other people and third parties like banks, and they all have their own timeframes for doing things. I usually tell my clients that it will probably take twice as long to close the deal as they think or as was agreed to in the LOI. It might take less time, but nobody is upset when the deal gets closed early.