Five Legal Considerations When Buying a Business
You’ve found the business of your dreams to buy. Even so, it can be an intimidating endeavor. We see the appeal because you are walking into an essential framework someone else built instead of starting from scratch. Here are five legal aspects to think about before you sign the dotted line.
- Stock Purchase Versus Asset Purchase Agreement. One early question you should be asking is whether you will do this deal through an asset purchase or a stock purchase agreement? In an asset purchase agreement, you will be buying the company’s assets. The Buyer (you) will create a separate entity (this can be an LLC or a corporation) to acquire the assets. In other cases, you may be acquiring the company itself by buying its membership or stock. Whether you should do an asset purchase or acquire the company itself is a decision you should weigh with your accountant and attorney after considering all the benefits and liabilities. This analysis includes tax issues, liability issues, and issues with minority shareholders or membership interests.
- Due Diligence. Bringing in an attorney for due diligence is a lot like bringing in a mechanic to look under the hood before you buy a used car. We ask questions about the company’s history to help ensure that you get the information you need to make an informed decision. This analysis includes examining how the company observed corporate formalities, employment issues, compliance, etc. This is usually an excellent time to bring in an accountant to review the books.
- Drafting the Terms of the Purchase Agreement. There are usually several things that can arise in negotiating the purchase agreement beyond price. For example, where does indemnification come into play? Will the Seller stay on and help you after closing? Are you buying any intellectual property? How does that intellectual property transfer to you? Will there be a non-compete by the owner? These are just some of the questions we often think about in every transaction. Each transaction can be unique and present its own issues. It’s essential to think through what happens after closing the deal.
- Money. When it comes to money, there are a few ways you can buy a business. Cash is usually the easiest and cleanest. Sometimes seller financing is an option, in which case you will need a promissory note and possibly negotiate whether any collateral or a personal guaranty will secure the note. Maybe you go with an SBA loan. Regardless, it will help if you have a solid team working together to get you to the closing table.
- Before Closing. Many things usually happen in a flurry before closing. For example, are you assuming contracts? Do you need approval from the Seller’s landlord to take over their commercial space? How is the money changing hands? Do you need an escrow agent? It is always good to surround yourself with advisors to guide you through this process.