5 things to consider when buying a business

These are issues that I have encountered on numerous ocassions while helping people buy businesses and sell businessses.

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These are issues that I have encountered on numerous occasions while helping people buy businesses and sell businesses.

1.  Stock or Assets? When you buy stock you typically get the whole business including the company the seller used to operate the business and ALL liabilities and assets of the business.  When you buy assets, you are choosing to purchase the items in the business that you will need to carry-on on the business.  This usually means real property, equipment, customer lists, names and the like.

2. Inside competition. Is the seller going to compete with you after the sale? There is nothing wrong with competition, its a good thing.  However, there may be something wrong with paying six figures for a business only to have the seller set up shop across the street from you after the sale or throw up a competing website.  Remember, the seller has done all this before and has built relationships with the business’s customers.   If you are paying for the customer relationships and brand power (“goodwill”) you need some protection against competition from the seller for a reasonable period of time.

3.  Check the gap. The time between you sign the purchase agreement and the time you close the transaction is critical because usually the seller is still in control of the business, for better or for worse.  It is necessary to have clause in the purchase agreement that requires the seller to operate the business “normally” in the gap period.  It is better to actually ensure this has happened prior to signing the closing documents.

4.  Meaningful due diligence. Due diligence is the buyer’s chance to uncover facts about a business that might effect purchase terms or even the purchase.  Due diligence is carried out through inspecting and analyzing records and reports and talking to people who are familiar with the business.  Most transactions provide a buyer with the right to conduct “due diligence” on the business being purchased, after contract signing prior to closing.  Oftentimes, this right goes unused.  This puts the buyer in the position of discovering critical facts about the business after closing when it is typically to late to address them.  Have a contract that outlines your due diligence rights and carry out the necessary inspections.

5.  Clear purchase. Are you getting what you think you are buying?  Far to often, a buyer believes a critical element of a business in included simply because it is “used” in the business.

I deal with these issues on a regular basis, if you need some help I recommend contacting me before the purchase is complete, I can be a lot more helpful at that point!

Posted by Shawn Roberts

On this blog, I write about and try to answer practical Oklahoma legal questions. My focus and most experience is in estate planning and business issues including Oklahoma non-compete law. I make a living as an attorney in the law firm I founded, Cazes Roberts, PLLC in Oklahoma City. I live in Edmond with wife Amy and my two children, Sam (17) and David (9). We live precisely in the path of where the "wind comes sweeping down the plains."

3 comments

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J. Daniel A.K.A. “The Contractors Insurance Geek”

One more thing that falls into your due diligence category would be potential liabilities associate with the business you’re buying. Commercial liability insurance rates are on the rise again in 2011 and you need to get an idea of what annual premiums might cost with your new venture.

shawnjroberts

You make a good point, thank you for your comment.

Shawn