Buying an existing business has many variables to cover. Whether through a business purchase or transfer agreement, there are many options regarding how a small business lawyer can help you with your business planning and purchase.
Before you start negotiations, it is important to know the role of the buyer and seller from a legal standpoint.
What Kind of Lawyer Do I Need to Buy a Business?
When you work with a lawyer to buy a business, they can write and review clauses in the final contract and ensure you are using the most mutually beneficial buy and sell agreement. A lawyer helps business owners and sellers alike through negotiations and drafting legally compliant documents.
Buying a business allows you to assume full ownership of an existing business — making it more profitable than traditional entrepreneurial endeavors.
While you can do plenty of research alone, you should work with a lawyer to buy a business and possibly consult a business broker. Business brokers assess the value of a business, and they assist buyers and sellers in the legally compliant transfer of all business assets.
Here is an article with more information on what a business broker does.
What is the Structure of Buying a Business?
Buying a business and assuming full ownership of its assets differs from purchasing a property. While property sales may be included in the transfer agreement, there are far more variables to consider, such as employees, equipment, and customer information.
Before you ever make moves to purchase a business, you should first investigate it in detail. Ask yourself why you want to buy this business and whether you can continue to run the business and its current owner(s).
Some factors to consider before you buy a business include:
- How long has it been in operation
- A history of positive cash flow
- How well do you know the business’s industry
- A diverse client base (no more than 20% of profits provided by a single customer)
- Demonstrated strategic growth with a plan for long-term development
- A personal interest in the business and vision for its future
Validating a business is an important step before you make an offer. Business valuation is a comprehensive process, one best left to a professional business broker or intermediary.
The business broker can look at the company’s financial history, including its net income. The process for valuing a business varies by industry and type. For example, vaulting an e-commerce store is different from valuing a brick-and-mortar retail store.
Once you have found a business that you want to buy and are confident that it is a valuable and profitable investment, you can start negotiating with the current owner. When you reach an agreement, they will submit a letter of intent (LOI).
A letter of intent is a letter from a seller to a buyer that outlines what business assets and liabilities will be included in the fully executed purchase agreement.
Part of your final sale may include an equity transfer agreement. This legal document transfers full ownership of a business to another person. This contract also applies when an individual shareholder can sell their portion of a company to an outside buyer.
Here is an article with more information on equity transfer agreements.
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What Questions Should You Ask When Buying a Business?
Before you purchase a business, you’ll have to investigate it to ensure it is in good standing thoroughly. In law terms, collecting as much information as possible is a process called “due diligence.”
Due diligence protects you from unwise investments, which may have hidden variables and risks that aren’t immediately obvious. For example, after carefully reviewing the company’s financial history, you might discover that it loses 60% of its net income after taxes. In this case, you may want to rethink your investment.
Considering these questions as you perform your due diligence before buying a business.
1. Why is the owner selling their business?
The reason for selling could largely influence your decision to buy. For example, some sellers may have scaled their business effectively, and now they want to move on to new opportunities. Others may run into health issues, be ready to retire, or be unable to manage the business.
Selling is important because it can reveal things about the company itself. For example, suppose the owner is selling because of declining revenue as a seller. In that case, you must consider whether you can turn the company’s finances around.
2. What is the future of this business?
You should consider the future of the business as well as its industry. For example, is there enough market demand for the company to remain profitable? To answer this question, you will have to research the industry and market of the business.
Consider what opportunities are available as the potential future owner. For example, buying a business and its liabilities, only to run out of money in two years, isn’t a fruitful investment. You may not even have enough time to recoup the money you spent acquiring the business.
3. Are there any outstanding debts?
When you buy a business, you can inherit its debt, too. Personal debts (such as loans) in the owner’s name will never fall to you, but debts in terms of financing and leases will transfer to you.
Inheriting debt as a business owner may not be something you are comfortable with. You must consider the long-term financial costs in addition to the selling price.
4. What are the operational expenses?
A facet some business buyers overlook is the actual cost of ownership. After the fully executed purchase agreement is finalized, you will be solely responsible for running the operations. As a result, keeping the business open and profitable could be far more expensive than anticipated.
Ask current owners for financial records, including financial reports detailing their average monthly operational costs. This can give you a clearer idea of what expenses you will have to cover as the owner.
5. Is there any intellectual property that needs to be transferred?
When you buy a business, you might also need to purchase the intellectual property integral to its success. This may include branding elements, including the company’s name and logo, confidential information, automated processes, and in-house methodologies.
The owner may want you to sign a confidentiality agreement as part of the purchase to ensure that the business’s key information remains within the company.
You can also have them sign a confidentiality agreement and a non-compete agreement to ensure they do not use their inside knowledge to start a competitive brand.
6. Are there any outstanding lawsuits against the business or its owners?
Lawsuits are one of the variables that may complicate buying a business. Any pending investigation or litigation lawsuits may negatively affect you as a buyer later. If there are any outstanding lawsuits with the company, you may want to hold off on purchasing until they are resolved.
Here is an article with more questions to ask before buying a business.
What Are the Benefits of Working With an Attorney to Buy a Business?
Working with a lawyer to buy a business can help you avoid any potential risks left out or hidden within a buy and sell agreement. The wording in legal contracts has to be precise to grant each buyer and seller specific rights and benefits.
A seller may deliberately omit or include specific clauses in their agreement that negatively impacts the buyer. Again, a lawyer can help you ensure that you get the best deal and that there are no hidden terms or conditions you unknowingly agree to.
Furthermore, an attorney is the best party to use as you work through negotiations with the seller. Lawyers are expert negotiators who know how to get the best deal for their clients. By working with a lawyer, you can reach results faster and close deals sooner.
How Do You Buy an Existing Business?
You will need to search online for businesses for sale, then approach the owner. However, you should conduct due diligence by thoroughly researching the business before making an offer.
Working with a business broker can help you valuate a business; you can also research on your own to see how profitable the company is, its growth, and its current value.
Sellers should be willing to share financial records with potential buyers. However, if they are not ready to show their income or operational expenses, it is best to look elsewhere.
Finally, you should work with a lawyer to buy a business. They can review contracts, leases, and other documents associated with the company and inform you on what they believe is the best course of action.
They can write a business purchase agreement for you if you decide to make a purchase.
How Do I Write a Business Purchase Agreement?
The best way to write a business purchase agreement is to work with a lawyer to buy a business. However, writing these types of contracts alone is difficult because they change too drastically for every sale.
There are many factors to include in any business purchase agreement, including:
- Details about the business
- Liabilities the buyer will assume upon transfer
- What assets are included in the sales price
Furthermore, many additional leases and contracts must be transferred from the seller to the buyer to complete the sale. The best way to ensure your agreement is secure and legally compliant is to have an attorney write your agreement.
How Much Does It Cost to Hire a Lawyer to Buy a Business?
Fees will vary from attorney to attorney, depending on the size of the business being sold. A lawyer assisting corporations, for example, will charge far more than one who helps small business owners buy and sell new businesses.
On average, expect the cost of a lawyer to buy a business to be approximately $275 to $375 per hour. They may also require a retainer that costs several thousand to over $100,000.
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