Buying a business can seem to be as straightforward as a verbal agreement between the owners and the buyer, but there are many risks that a buyer needs to be aware of. The old saying “buyer beware” applies to all buyers even if they have known the business and the owners for a long time. So, you might be aware of how to find a business for sale but are you really aware of the work that goes on behind the scenes from a legal perspective?
While it is possible to buy a business with minimal lawyer involvement, (i.e., calling a business attorney only to review a sales agreement) doing so can be unwise because as the buyer you are taking on the most risk. Business attorneys can be helpful when buying a business, for example, they can potentially review a wholesale lenders list or lists of possible businesses that are up for sale to see which ones are the most suitable for their client’s needs.
Hiring a business lawyer when buying a business is crucial for three important reasons.
- How you structure the deal can be tailored to your needs.
There are many ways to buy a business – asset sale v. equity sale, seller financed v. loan, and transition periods for the prior owners. When you work with a business attorney you will be in a better position to choose the best deal structure for you. The attorney will help you think through issues like – is an asset sale where you leave behind more liabilities better for you? Or is an equity sale where you maintain the business’s history more beneficial?
The most important aspect is that your legal documents should reflect the legal realities of your handshake deal. While the result is the same (you are the new owner) the path that you take to get there can have an impact on how you start off on day one. When you have a business it is vital to organize your Asset allocation so that if anything were to happen the assets can be distributed effectively.
- Risk Allocation and Due Diligence
Would you ever buy a car without looking under the hood? NO! So why would you buy a business without ever receiving a full disclosure? You should expect to delve into the business’s background, financial and performance histories, ongoing transactions, projections, sales reports, profit and loss statements, contracts, and so forth. Business attorneys are here to help you request and manage the due diligence period, to adjust the business deal based on your findings, and to allocate the risks from problems.
Sellers will put their best foot forward, and that could mean downplaying an existing or potential problem that the company is facing. Due diligence must be performed thoroughly and with the guidance of a seasoned business attorney. Otherwise, if you declare that you performed your due diligence and it turns out you overlooked a crucial problem, you can no longer hold the seller accountable or sue them for the alleged misinformation or subsequent liabilities.
One example of a risk that the buyer faces is that the prior owner says they have always paid their taxes on time, but can they back it up with tax returns? If yes, great! But what if like most businesses there are some gaps in the accounting? If that is the case, a business attorney can help craft a purchase agreement that has the prior owner guarantees the disclosed materials and indemnify you if an agency finds something wrong later and penalizes you. This is called risk allocation and it is an important tool to use when buying a business. It is important that financial and documented accounts are kept updated, so when a buyer takes over, they need to not make the same mistakes as the previous owner and potentially look into a lease accounting tool or something to the same effect, so they are able to make sure their finances add up to what they have been planning.
- Lawyers do the legwork in negotiating the terms of the purchase agreement.
For buyers and sellers negotiating the price of the business is a crucial step. It’s more than putting a number on the table. You’ll want to specify what that number entails: assets, liabilities, down payment, installments, term duration, and more. An attorney will help you sort out these details and ensure that the final terms are favorable to you.
These 3 issues are merely an overview of what a business lawyer does when assisting a buyer to purchase a business. The attorney’s knowledge of the law, familiarity with the industry, and access to reliable sources of information will be valuable in this major undertaking.
Seek legal advice when buying a business from our business attorneys at the Apex Law Group. We have supported buyers in this process for over ten years.
Call us and schedule a meeting with our business attorneys.