Things to Consider When Buying a Business

JMarkJMark Posts: 1subscriber
edited March 2009 in Selecting a Business











Whether you are thinking of buying your first business, or
ready to scoop up a competitor, the purchase of an existing business can be a
very stressful endeavor. The following are some (but not all) of the things to
consider, as you move forward, to make wise, informed decisions along the way:


1)         Have
a well-drafted purchase agreement signed by the Seller.
Don’t make the mistake of pulling a contract off the
internet and thinking it will work right for you and the business you want to
purchase. Contracts should be crafted to meet the factual and legal needs of a
client buying a specific business in a specific state. Laws are different in
different places, and also change all of the time. Industries have different
challenges, legal constraints and operational needs. Further, the more written
representations and warranties to you from the Seller about what you are (and
are not) buying, the better you will be able to sleep at night. Be careful to
have representations and warranties that are specific to the business you are
buying. Relying on important oral promises from a Seller is a disaster waiting
to happen. In addition, you need to have myriad ways of backing out of the deal
if you change your mind. Don’t be locked into buying the business too early in
the process.


2)         Lean
towards buying the assets of the business
,
not the ownership interests of the entity (e.g., corporate stock or LLC unit
sales). While there are a few exceptions, a stock sale is nearly always not the
best thing for the Buyer. You will be potentially buying unknown liabilities
and claims against the entity, not just the assets.


3)         Have
professionals look over the assets to be purchased, important contracts to be
assumed, and the books of the business, to make sure all is as you expect it to
be.
Have a CPA consult with you on tax
issues related to purchasing the business even before you sign the purchase
agreement.


4)         Insist
on a non-competition agreement, non-solicitation agreement and agreement on
training from the Seller and key persons. Regardless of your own experience in
the industry, there are issues unique to each business that only the Seller
will know.
Further, you don’t want the
Seller or other key people setting up a competing business across the street.


5)         Make
sure you have a good handle
on how you
will keep existing customers or clients, the assets which the Seller will (and
will not) be selling to you, and what liabilities of the business you will be
expected to assume. Also, try to lock in key employees to stay with the
business after the sale.


6)         Consider
starting the work early
to get leases
(and other important contracts) assigned to you so that there are no delays in
closing.


7)         Make sure
that an attorney (who is very experienced in corporate and business
transactions) is doing the usual and necessary work to properly close the
purchase of the business,
including
ordering lien searches, tax certificates, document drafting, liability payoffs,
lender coordination and escrow. In reality, very few attorneys have the
experience and legal knowledge to properly negotiate and close a corporate or
business transaction. Would you go to a family doctor to perform a brain
surgery? Likewise, you need to go to an attorney who specializes in business
and corporate transactions.


8)         If
it looks too good to be true, then be very careful.
Use the "smell test". If something just does not
seem right, ask questions, and go with your instincts. It may be far less
costly for you to back out of a deal, than buy a "lemon" and pay far
more in liabilities and losses. Not all businesses are equal, and you should be
aware that there are plenty of other businesses to buy.


In conclusion, while buying a business can be stressful,
you can make the experience far safer and pleasant by relying on professionals
and your own good business judgment. While the time and cost to take these
prudent steps may not be your favorite thing to do, it may just be one-tenth of
the time and expense which you would incur if you do not carefully consider
these issues.


And now, the kind of stuff which I learned in law school that I need to tell you.......


The foregoing post provides general information about
business planning, and is provided with the understanding the publisher and
author are not rendering legal advice or other professional services by its
publication. Information contained herein should not be acted upon without
professional advice. 


I hope that last paragraph wasn`t too annoying.

Comments

  • WebJunkyWebJunky Posts: 8subscriber Member
    jayne,
     
    the market determines the worth.  M&A deals are based on industry multiples many times....but it all boils down to your true earnings (known more commonly as EBITDA in the business world).  for example, i am in the internet marketing industry...so a multiple of 8-10 is not uncommon.  if my site generates 100k a year, i can easily sell it for 800k-1M
     
    when i was a CPA working for a service firm, there were deals i did at a multiple of 2,4,6, all the way up to 10.  but almost each time the price is dependent on the earnings the business generates.  that is why buyers usually hire CPAs to conduct financial due diligence to validate the EBITDA figures reported by sellers, which are often padded to reflect a rosy business.
     
    the higher the price the better for the brokers.  after all they (most of them) charge on a percentage of sale basis. attorneys do work with brokers.
  • infinique1infinique1 Posts: 0subscriber Member
    Thanks, those are really important factors that you seriously need to consider before buying a business.
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