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Jul
13

Buying a Business: An Overview

By: Richard E. Korb ©copyright2011[1]

Preparation: When you are deciding to buy a business, first there are some personal questions to consider:

-         Is owning a business right for you?

-         Do you have the time, attention to detail, and ability to cope with stress?

-         Asides from making a profit, why do you want to buy a business?

-         Can you accommodate the risks (i.e. do you have adequate savings)?

-         All things considered, what is your potential for success?

And some practical questions:

-         Where can you find a business for sale?

-         Should you search for a franchise or an independent business?

-         What type of business do you want to buy? Retail? Coffee shop? Services?

-         Which types of businesses best match your skills, capabilities and knowledge?

Deciding whether to buy a business is clearly not a simple question and only you will be able to answer most of these questions no matter whom you consult. When you begin your search, there are many sources you can consider: the “business opportunity” section of the classifieds in your local paper, various types of newsletters such as in-house brokerage publications, business brokers listed in the telephone yellow pages, word of mouth, magazines, and the internet.

It is not recommended to rely solely on a business broker, but it can be helpful. Searching for the right business to purchase is not easy and will require time-intensive research, of which the result will hopefully be a profitable investment. Buying a business is a risk, so there is no point in rushing your research.

The Purchase

Once you have found a business you would like to purchase, the next step is preparing for the purchase transaction.

Preliminary Research and Discussions

Before you begin negotiations and drafting the agreement, “due diligence” must be completed. Completing your “due diligence” refers to the review of the business’s history, contracts, lease(s), its ability to perform in the future, reputation, and finances—assets and liabilities. You may want to strongly consider employing professional assistance to weigh the value aspects of the company and clarifying any legal constraints.

In order to do this, you will need access to the business’s certified financial records. To have this access, you will most likely be asked to sign a confidentiality agreement having you agree to the fact that you will only use the information to check out the business. Stipulate in the agreement that you can share the information with your lawyer and accountant. This agreement may also be a part of your letter of intent as the buyer to the seller. The main point of a letter of intent is show of your non-binding, but serious interest. In exchange for your confidentiality, you can ask for the seller not close a sale with other potential buyers until a particular date.

Before the agreement can be drafted, negotiations must occur. The majority of the negotiations will be dedicated to the purchase price. To aid this process, you may want to invest in hiring an experienced appraiser or a Certified Public Accountant (CPA). When both parties have agreed on the purchase price, the terms of payment, and which assets or stock will be purchased, the terms can be drafted.

Drafting the Formal Agreement

If you and those you might consult deem the finances acceptable and have resolved any legal issues, you and the seller can begin to draft the acquisition agreement, which consists of:

  1. Introductory provisions
  2. Terms of the transaction
  3. Closing

Much like any contract, the introductory provisions will delineate who is party to the contract (who or what constitutes the “buyer” or the “seller”), briefly describe the transaction, and provide definitions. The terms of the agreement include the purchase price, the terms of payment, the dates of business turnover, and the structure of the purchase. It is strongly advised that you seek the assistance of a lawyer in reviewing the terms of the agreement.

An acquisition or purchase will be structured as an assets or a stock acquisition. An asset purchase means you are buying some or all of the seller’s assets such as equipment, facilities, or inventory without his or her liabilities. The seller has the power to choose which assets to sell, to retain portions of the business (i.e. the company’s stock), and to remain responsible for some of the company’s liabilities. In a stock purchase, the buyer acquires all or some of the seller’s stock. Unlike the immunity to liabilities that comes with the purchase of assets, when purchasing stock, you are also buying hidden liabilities, debt, contingencies and assets that exist in that business entity. Additionally, the contract may not be an acquisition at all and instead be a merger, where two businesses become one. The result will be a combination of characteristics of assets and stock purchases.

The closing of the agreement will have a provision for when each party will deliver his or her documents and when and where the closing will take place.

Closing the Deal

When the agreement is signed, the deal is most often not closed until certain conditions are met. Obligations of the buyer may require you to file documents with the Secretary of State or the Securities and Exchange Commission. Or the sale may contingent on the approval of the shareholders. The buyer may also terminate the contract if there is a change to the material condition of the business. The buyer is also not obligated to close the deal if the obligations of the seller have not been met.

If you have any questions, please contact Richard Korb. Richard has over 30 years of experience in business law and can guide you to a successful business investment. Richard can work with you by reviewing and analyzing your options, assisting your “due diligence,” and drafting the terms of your agreement. For a free consultation with Richard, call (510) 524-0903.

[1]RICHARD E. KORB is a seasoned attorney with 30 years of business, real estate, litigation and transactional experience. Over his legal career, Richard has successfully litigated and resolved over 300 court cases in the fields of contract law, real estate, employment, unfair competition, and general civil law and he has drafted and negotiated over 200 contracts and licenses for large and small companies alike. Richard leverages his experience as a former partner in a 100-person law firm and chief counsel for a public software company to assist individuals and companies, from start-ups to multi-nationals, with a broad spectrum of legal matters.  In addition to his legal practice, Richard is a court-approved mediator and serves on the Alternative Dispute Resolution (ADR) panel for both the Alameda and Contra Costs County Superior Courts.

Note: All content  on our website or blog  is for informational purposes only. It is not intended to serve as legal advice and no attorney-client relationship shall exist by virtue of its dissemination. Should you wish legal advice, you may contact Richard for a consultation at 510-524-0903. ©Richard Korb. 2011.

 

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