Before you sign the paperwork to buy an existing business, consider following a checklist to make sure you think about all of the legal and financial considerations. There are several crucial steps to take before a buyer begins the purchase process. Performing due diligence before and throughout the transaction can help limit legal liability and foster a smooth closing process. To talk with a seasoned legal professional who can help, consider calling the experienced San Francisco business attorneys at Von Rock Law at 866-720-0195.
Perform Market Research
Before reaching out to potential sellers, prudent business buyers should perform market research to decide what market is a good option for them. Additionally, they may benefit from considering different types of business structures and models as potential targets. Limited liability companies (LLCs) provide different levels of protection and flexibility compared to corporations or partnerships.
When conducting market research, buyers can use online tools and reports such as those provided by the Risk Management Association (RMA). The RMA publishes detailed reports throughout the year for various industries, a good starting point for those looking to understand what markets are attractive. Buyers can also speak with their network to find out the general impression about specific industries or businesses.
Reach Out to Potential Sellers
Once buyers understand the market they wish to enter, they are ready to reach out to potential sellers. When speaking with the current owners, the following subjects may be helpful for the parties to discuss during the conversation:
- The current business owner’s background and plans;
- The reasons for selling the business;
- The day-to-day operations of the business;
- The financial health of the company;
- The atmosphere of the company, including employee and customer feedback;
- The past and current successes and setbacks of the business;
- The history of the company and its management; and
- The business’s current relationships with vendors, customers, etc.
This conversation can give the buyer key information for them to appreciate the historical and current status of the business. It also provides the buyer with an opportunity to determine if the potential seller is someone who will be easy or difficult to work with during the sale. Likewise, the business buyer can evaluate if the charisma of the current owner is a primary reason for its success.
Perform Due Diligence
Once the buyer and seller decide to move forward with a potential purchase, it is time for the parties to conduct due diligence. Due diligence is the process of performing necessary research to understand a transaction, fulfill one’s legal requirements, and avoid or limit liability. Entire books have been written on due diligence, and it is arguably the most critical part of any business transaction.
Hire a Professional Team You Trust
Conducting due diligence requires meticulously reviewing all aspects of a business and a proposed transaction. For that reason, the buyer should carefully consider retaining a team of professionals in a variety of fields, such as:
- Banking
- Accounting
- Real estate
- Legal
- Business consultants
Without the right pair of eyes reviewing a document, key details can be overlooked, which can cause huge issues (or even lawsuits) down the road. Consider meeting with the legal professionals at Von Rock Law to help you evaluate the transaction, perform due diligence, and put together a buying an existing business checklist.
Review Lists of the Business’s Assets and Liabilities
Early in the process, the seller will send the buyer a detailed list of the business’s assets, obligations, and liabilities. This is typically referred to as a Letter of Intent (LOI). The LOI affirms that the parties expressed the mutual intent to proceed with the transaction and outlines lengthy information about the business.
This document is vital and should be reviewed with exceptional care. If the buyer has questions or believes the LOI is incomplete, they should consider contacting a professional or asking the seller to clarify or provide further detail.
Read Existing Contracts, Governing Documents, and Other Key Agreements
The buyer or their professional team should request and review all existing documents involving the business. This includes the following paperwork:
- Articles of incorporation or organization
- Bylaws or operating agreements
- Leases
- Vendor agreements
- Financing agreements
- Stockholder contracts
- Buy-sell agreements
- Franchise agreements
- Carryover obligations
- Membership interest or stocks
- Real estate contracts
At this juncture, it is of immense benefit for the buyer to have access to all these documents. Essentially, they should have copies of and review anything with the company’s name on it. This gives the buyer an idea of the current state of the business and what the buyer would be signing on to if the sale goes through.
Research the Financial Health of the Business
Before buyers sign anything, they should fully understand the financial health and history of the business. They can accomplish this by obtaining copies of the company’s financial records, such as tax returns, balance sheets, and quarterly reports. Unless the buyer is a banker or accountant, it may be prudent for them to call on a knowledgeable financial advisor to analyze the records and provide an assessment.
Understand Why the Current Owner Is Selling the Business
There are many reasons for selling a business, ranging from impending bankruptcy to an owner who wants to change careers. Prospective buyers should be clear about the real motivations for the seller’s decision to sell the business and the potential impact it can have on the seller if they become the new owner. Purchasers should have frank and open conversations with the seller about this topic and thoroughly review the documents to determine if the paper trail shows any red flags.
Determine the Appropriate Price and Funding Options
With due diligence out of the way, it is time to determine the right price and funding options. A multitude of factors can impact the right selling price for a given business, such as:
- The total assets of the business (including on-hand and future)
- The total liabilities and obligations of the business
- The business’s brand recognition
- The company’s goodwill
- The trajectory of the business
- The amount of risk that the prospective buyer is taking on
The parties will negotiate to settle on a price on which they can agree. The buyer should also reach out to bankers, accountants, and attorneys to determine the appropriate financing option.
Prepare Effective Purchase Documents
The final step before exchanging money is to draft and review effective purchase documents. Most buyers benefit from having professionals prepare and review the paperwork to affect the transaction. These documents aim to encapsulate the purpose of the deal, what is being sold, the price, and what happens once everyone signs the contracts.
Because of the finality of the documents once signed, it is imperative for the parties to thoroughly review and understand the contracts before they proceed. Likewise, the parties should ensure that the agreements adequately define and protect their rights. Many business lawsuits stem from misunderstandings and ambiguities, which can be avoided or limited by providing accurate and precise language and communication.
Contact a California Business Lawyer to Ensure Your Legal and Financial Rights Remain Protected
Buying a business is an exciting step for any entrepreneur, but it requires diligent research and consideration to carry out effectively. The legal team at Von Rock Law can help you understand the aspects of buying an existing business checklist and help you take the appropriate steps. Consider scheduling an appointment with their team by calling 866-720-0195.
