How to Buy a Business:
A LAWYER’S PERSPECTIVE
By Michael R. Liss
How can you increase your chances of success in business?
That is a question many new business owners ask. Obviously many elements are
necessary to succeed in your own business. It is my experience that buying an
existing business is one of the best ways to bring together those elements
needed for your immediate success.
New business owners always want to know how successful or profitable their
new business will be. Their initial business plans are, among other things,
attempts to estimate early results. But these are guesses at best. When you buy
an existing business, the seller’s past performance can be the best indicator
of your future success.
Rely on Historical Performance
When you start a business from scratch, there is no way to
know how well that business will do. You could start it as a franchise, and then
you would have some clue as to how it might perform, because it is a clone of
other similar stores in the same franchise chain. However, what if you could
know how this business at this location with these
employees performed? What if you could see exactly how profitable this
business was last week, last year and for each of the last five years. That
would be reassuring to you and to your potential lenders or investors. That is
what buying an existing business can mean to you.
Built-in Source of
Financing is another reason to buy an existing business. Most
businesses are sold with some form of seller financing. Typically, the seller
may require one-third of the price as a down payment and payment of the balance
over five years along with eight percent interest. This is, in effect, a
built-in source of a loan for you. That way you can afford to buy a bigger
business which then makes you an even larger profit.
The seller is frequently much more willing than a bank to
finance your purchase, because the seller truly understands the business and its
value. With respect to bank financing, banks are far more willing to lend you
money to buy a business which has a successful track record than they are to
lend you money on a startup business.
When you buy an existing business, you receive trained
employees right along with it. This can be very worthwhile. These employees can
be the reason customers come to the business as well as the reason suppliers
deal with it. When you buy the business you receive not only the equipment but
also the people who make it successful.
Start in Business
In business, time is critical. Starting a business from
scratch always seems to take forever. This is because there are so many aspects
of the business you need to coordinate before you can start operating and then
eventually become profitable. When you buy a business, everything is there. It
is an operating business. You start immediately.
Can You Find a Good
Business For Sale?
One of the biggest challenges of buying an existing business
is simply finding one for sale. There is a shortage of good businesses for sale
— so many buyers, so few sellers. You will need to use professionals to help
you. Use the networks of business attorneys, bankers, accountants, insurance
agents and business brokers. They know business owners. You will also find
yourself calling and visiting business owners personally to inquire about buying
their businesses. It may be a long search.
As a business lawyer, I work on the "due diligence"
investigation and prepare the legal documents to purchase the business. I focus
on the contracting process. There are three elements to this process:
Investigate, negotiate and document.
During the due diligence investigation, you will find out if
this business is really what the seller told you it was. This thorough
investigation is done before you buy the business. The business books and
records are carefully examined by your lawyer, accountant and you yourself. This
includes financial statements, tax returns, customer contracts, supplier
relations, employee issues, real estate leases, title to business properties,
trademarks and all other aspects of the business that you deem important. If the
condition of the business is found to be unsatisfactory, then you do not have to
Purchase of Assets
Businesses can be bought by either buying the assets of the
business or by buying the stock certificates of the selling corporation. Either
way, you end up with the business. Most deals are structured as a purchase of
assets in order to minimize the chance of the liabilities of the seller becoming
the obligations of the buyer. Also, there may be better opportunities for the
buyer to depreciate the purchased assets and take tax writeoffs when the buyer
The typical legal provisions in an Asset Purchase Agreement
are listed in the table accompanying this article. In general, you will find
that sellers desire short agreements that just describe how they will get their
money. However, in general, you will find that buyers want long agreements in
order to carefully describe the exact condition of every aspect of the business
so that if there are any surprises, it will be the seller who has to pay for the
harm caused. Since buyers do not want to become responsible for the seller’s
problems, buyers require the seller to state exactly what problems do exist and
that in fact no other business problems exist. This is also why the lawyer for
the buyer tends to write the first draft of the Asset Purchase Agreement.
Hire an Experienced
If you are planning to buy an existing business, you will
need an experienced business lawyer, one who does these deals frequently, knows
the terms, negotiates superbly and, most importantly does not kill your deal.
Your business lawyer will check out the business you propose to buy and then
prepare the legal documents to protect you. That way you will receive the right
business in the right condition.
TYPICAL CONTRACT PROVISIONS
ASSET PURCHASE AGREEMENT
- Identification of Parties
- Assets Being Sold
- Purchase Price and Financing
- Closing Requirements
- Covenants and Agreements
- Representations and Warranties of Seller
- Representations and Warranties of Buyer
Michael R. Liss is a business and franchise attorney working
to help businesses start and succeed. He is a frequent instructor at area
colleges on buying a business, franchising, financing, and the legal issues
which business owners must know. He can be reached toll-free at 888/372-6529.