Perils of Buying a Business
Buying a business is a big decision. It is also an adventure. It starts with finding a business that meets one’s requirements. Then, buyers should hire an attorney to draft an asset purchase agreement or stock purchase agreement that describes the rights and obligations of the buyer and seller, as well as, the applicable time tables for the sale.
Many buyers do not understand the importance of the purchase agreement, but it is an essential part of the buying process. Similarly, many sellers do not understand the importance of a due diligence period. Due diligence periods are critical to the purchase process. The sales process always uncovers questions. Sellers can never fully communicate all the ins-and-outs of their business. In many cases, they have been operating the businesses for several years and, very often, what seems self-explanatory or mundane to a seller, is very foreign to a buyer.
Another critical part of the process of buying a business is negotiating with the landlord. Landlords are typically not required to approve of a new tenant, or even new stockholders. Buyers should try to make as much of the sales contract contingent until the lease assignment (or new lease) has been agreed by the landlord.
As part of both the due diligence process and the negotiations with landlord, buyers should make sure they inspect the premises. Hidden transaction costs could lie in a broken HVAC, leaky plumbing, or faulty electrical. In addition, it is possible that a new certificate of occupancy may be required. Therefore, buyers should remain cognizant of possible delays in closing or, worse, delays in operating after closing if inspections are required and not performed prior to closing.
Finally, the closing transaction. Buyers must make sure that all assets transfer. In addition, though, buyers must make sure that all the contracts are assigned so that the business may continue operating in a streamlined manner.
The most important aspect of buying a business is to avoid the fear of loss. A buyer should not be pressured to close more quickly than s/he is ready. Attorneys, accountants, and other consultants can act as a good insulator to keep a pushy seller at bay.
When buying a business, one should invest in consultants to make an informed decision. It is said that money is made on the day one buys a business. It only follows that money may also be loss on the day one buys a business. Spend a little to save a lot.
Robert Newton is an attorney based in Frisco, Texas that practices in business law, real estate law, and estate planning.
