Thinking about buying or selling an existing business? Here are some things you should know before you take the plunge.
A buy/sell agreement anticipates a time when a business owner wants or needs to leave the business. The purchase and sale of a business isn’t an open and shut deal – both parties need to scrutinize their records and the business’ assets to ensure what you see is really what you get. Failure to do so can lead to an angry buyer or seller who feels defrauded and an expensive court case down the road. Further, structuring a business deal can be complicated if you don’t understand the differences. To protect yourself, it is worth the time to enlist the help of a corporate attorney so you aren’t responsible for liabilities you don’t want. Here are some things to consider to avoid any unhappy endings.
Analyzing the Business
For sellers of a business, poor record keeping is the primary cause for failing to find a willing buyer and/or failing to get the price you really want. Start updating your financial and corporate records now, especially if you want to sell the business a year from now. As the seller, you should make available to potential buyers an up-to-date profit and loss statement, balance statement, and possibly a cash flow or income statement. You should have a corporate book on hand with all the statutory requirements – among other things, your articles of organization or incorporation, your operating agreement or by-laws, and minutes of meetings.
For buyers of a business, you should start by finding out as much as you can about the business, and if a potential seller is uncomfortable, then agree to sign a confidentiality agreement. Analyze copies of the business’ financial statements, such as the profit and loss balance sheets above. Ask to see their accounts payable and receivable, employee files and contracts, and major contracts and leases. Also ask if they have any currently pending lawsuits against them. Does the business ration supplies, or use lower quality supplies, than you otherwise might if you ran the business? If so, this needs to be an additional cost to consider. Are you going to keep the location of the business, and if so does it need a lot of work? You should ask to look at all the business assets for their current condition. A few owners may even permit you to follow them around for a day so you can get a feel for the business and how it is run. Take note of whether current employees and customers appear happy and satisfied. As a buyer, you want to know whether the company is well run and get a heads-up about what problems you might run into.
Offering to Buy or Offering to Sell the Business
Purchasing and selling a business involves heavy negotiation and, if properly done, a contract. Prior to making an offer or accepting an offer, you should consider enlisting the help of an attorney. A qualified attorney can assist a seller in the negotiation to get the price he or she wants for the sale of the business, and likewise, an attorney can protect buyers so they do not pay more than what the business is actually worth. Further, a seasoned attorney is necessary for sellers and buyers to ensure the offer includes essential deal terms that might otherwise “kill the deal” down the road if not dealt with initially (for both parties).
Once the initial terms are accepted, the parties will need to negotiate the form of the sale, whether as an asset purchase or a stock sale. Each form has advantages and disadvantages for the buyer and seller based on the particular situation, which is why a fill-in-the-blanks form doesn’t usually work. Additionally, there are tax implications to consider. Accordingly, it is wise to consult the advice of a qualified accountant in the purchase of a business, as well as an attorney to advise the buyer and seller of the business what form of sale would be the most beneficial for them.
Unless you have extensive experience in the purchase and sale of businesses, you may not even know what terms should be attractive to you, or that you should be asking for terms which were not presented. Therefore, consult your attorney and accountant to ensure you become your own happy, successful boss, or you sell your business and move on to bigger and better things.