Jerry Carter a Reno Business Attorney will discuss the in’s and outs of buying a business. It’s not just as easy as writing a check and taking over. You have to make sure you get some things right. At Sierra Crest Business Law Group, we have helped many owners either buy or sell their business. So let’s dig in! Here are four things you must get correct when buying a business from another party.
Know What’s Included In The Business Purchase
The first thing you need to get right when you’re buying a business is you
need to know what you’re buying and if it really exists in the business. Some typical things that people buy when they’re buying a business include the name, telephone number, accounts receivable, and you’ll probably want a non-competition agreement from your seller. When you’re buying a business it’s important to know what is included in the sale you want to make sure that when the transfer happens you can carry on all of the functions of that business. Other things like customer lists, equipment, inventory, basically everything that is important to run that business. There is a phrase that we often use in buying and selling businesses called “due diligence”. One of the purposes of the due diligence is to nail down what really exists in the business so when it transfers, you will have everything you need to run the business.
Understand The Liabilities and Responsibilities Of The Business
The second thing you need to understand when buying a business is you need to know and have a handle on what the liabilities and responsibilities of the business are. You are going to inherit those liabilities and responsibilities. You need to turn over all the rocks and find any hidden liabilities or business obligations. They could be hidden intentionally or by accident but it best to know exactly what they are. You will need to examine the books to ensure no liabilities will come back to haunt you. This process is also an act of “due diligence”.
Some things will be known to all parties and you’ll agree with the seller about who’s going to have specific responsibilities during the transition, in addition, you also should agree to assume some of the liabilities. But be thorough because there could be other things that are hidden intentionally or unintentionally. To find these items you will need to turn over some rocks like a thorough review of the books to get a handle on to know what kind of liabilities could come back and bite you down the road. This is another “due diligence” process that should be followed.
Leverage For Future Undisclosed Problems
The third thing that you need to get right when you buy the business is completing the transaction with negotiated leverage. In the future things may go wrong and you need to be ready to have a subsequent conversation with the seller about those things. The first thing
that happens in a purchase and sale agreement is that the seller
makes promises to the buyer about the state of affairs of the business
and about the absence of liabilities. The seller’s going to agree to indemnify you which is to stand behind you, defend you, or pay you
money if any of those promises are not true and turn into problems later on. So when the deal is done you need to have a written promise of indemnity. Next, you need to have agreement on some recourse if the promise turns out not to be true. Without the written agreement of recourse, you just have a nice promise to frame on the wall but it won’t do anything. Recourse could be something like holding back part of the purchase price as collateral in case something goes wrong. For example, you may hold back part of the purchase price for up to a year to be your collateral if a situation arises. If you’re paying for the business over time then you’ll probably want to have the right to set off those payments against problems that we’re not supposed to surface. There is a lot of negotiation that goes back and forth but the basic principle is that when you buy the business you need to plan on future dealings with your seller if go south. If you don’t build this into the agreement then you won’t have any negotiating leverage to solve problems with a minimum of expense and difficulty
The Whole Business Should Be Transferable
The fourth thing that you have to get right when you’re buying a business is you need to make sure that the whole business is transferable. There can be a lot of aspects of a business that don’t automatically transfer to a new buyer. I’m talking about things like governmental licenses, landlord consents, and rights of first refusal. As far as governmental licenses, there may be required licenses held by an individual within the seller organization that doesn’t transfer. In the case of landlord consent, the landlord is probably going to have veto power over a new tenant who’s taking over space. The rights of first refusal are people who have a right of first refusal on the sale of all or some portions of that business. Additionally, you need to make sure that if your seller is a corporation or a limited liability company, you’ll need to make sure you have signed off from all of the shareholders or at least a sufficient number of shareholders to be comfortable moving forward with the purchase. We’re putting this under the broader category of transferability issues where people other than the seller have some say so whether that crucial aspect of the business is transferred to you.
Buying a business can be an exciting time for a new business owner but there are a number of issues that should be resolved so that when you receive the business from the seller, you are free to operate and grow that business as you wish. So those are four things that you need to get right when purchasing a business, at least here in Nevada.
If you’ve got questions about the aspects of purchasing a business we would love to have a conversation with you to help set you on the road to a successful business purchase.