Buying a business is a considerable investment. It is also a complex transaction involving many issues. Here is what you should know when buying a business.
Due diligence: Know precisely what you are buying
You must do the research and thoroughly evaluate the business before committing to a purchase. You will want to review information including:
- Financial Statements
- Major contracts (e.g.,leases, employee agreements, franchise agreements)
- Customer/client and supplier lists
- Lists of the equipment, assets, and inventory of the business
- Ownership and transferability of licences, intellectual property, trademarks, etc.
To get a complete picture of the target business, you also need to understand its liabilities, such as debts, unpaid taxes, liens, and outstanding lawsuits. A skilled business lawyer’s advice and assistance with the due diligence process is essential. It may also be wise to involve other professionals such as accountants.
Price, structure, and terms: the who, what, when, and how of the deal
A “warts and all” assessment at the early stages will uncover risks and identify the business’s strengths and weaknesses. What you learn in the due diligence process will in turn help determine price, structure, and terms:
- How will the transaction be structured? Is it more advantageous for you to purchase shares or the assets of the business? Taxes and other liabilities are significant considerations in making this determination.
- What is a fair price? You must know exactly what you are buying to ensure you are paying a reasonable price. If the business has potential problems or risks, it may be possible to address those through a price reduction.
- Who is buying the business? You must decide whether you are purchasing the business personally, through an incorporated company, or using another business structure.
- When will the purchase price be paid? Consider options such as paying in a lump sum vs. installments (e.g., monthly, annually). You should also consider whether to hold back some of the purchase price to adjust for fluctuating inventory, accounts receivable, working capital, expected profits, etc.
- What terms and conditions are needed? Details in the written agreement are critical. The seller’s representations and warranties must be clearly stated in writing. All assets, equipment, and liabilities must be carefully described. Beyond that, you must determine if other contracts or consents are needed to ensure the business is property transferred—and to protect your investment. Examples include a Non-Competition Agreement binding the seller from setting up a new, competing business; intellectual property licensing agreements; and consent of a third party to take over a lease, license, or franchise, etc.
The bottom line is that knowledge and timely legal advice are the keys to buying a business. Our experienced business lawyers can guide you through the due diligence process, advise you on the best way to structure the deal, and assist with the legal documents (Letter of Intent/Term Sheet, Purchase Agreement and more).
