Being your own boss has a lot of benefits, and can bring some significant profits your way, but there are always risks involved when starting from the ground up. This is why many of those with the entrepreneurial spirit have found that buying an existing business has a higher risk-to-reward ration and eliminates some of the legwork required to start a new business. On the flip side, for experienced business owners, selling your business allows you to take a break (perhaps that backpacking trip you’ve always dreamed of?) or turn attention to a new venture without abandoning an existing operation. Like many commercial transactions, buying and selling a business has many moving pieces, and some unique features you need to keep in mind. Consider the following tips:
- Use the Right Broker. If using a broker, find a broker with experience in the relevant field. The framework and terms of the deal will usually be determined at the Letter of Intent stage, before attorneys get involved.
- Gather All Information. Whether you are buying or selling, get as much information as possible about your counterpart. If you are selling, confirm the buyer is financially solvent and competent to effectuate the transaction. If you are buying, research the seller’s business. While you will not be able to perform a complete review at the nascent stages of the deal (it will happen when lawyers get involved), learning as much as possible prior to a letter of intent can help to set a fair purchase price and reasonable expectations from the get-go.
- Take Advantage of the Letter of Intent. The Letter of Intent (LOI) is the first opportunity to put terms on paper. Use it to set a fair price from the beginning; changing the price only increases transaction costs. Also, prudent buyers and sellers can address other preliminary deal points at this stage. Once the LOI is drafted, talk to an accountant or tax attorney about the deal structure and its tax ramifications to avoid nasty surprises later.
- Do Your Due Diligence. Due diligence is the investigation and appraisal of the deal’s business and principals. This is the point where all parties ensure that they know all risks, each other’s histories, and any relevant information about the business and the transaction. This is also a good time to retain experienced business attorneys to sift through all documents. Important documents include:
- Organizational: bylaws, operating agreement, articles of organization/incorporation, annual reports, minute books, amendments, stock/unit certificates
- Title: real property, equipment, automobiles, software, intellectual property
- Operations: leases, service contracts, vendor agreements
- Government: licenses, permits, sanctions, FOIA history
- Determine Protections for After the Deal is Done. Post-closing protections are sometimes necessary, particularly when a party still has to perform some tasks after executing the deal. This can occur when parties agree to installment payments, where not all money is exchanged at closing, or when the seller must meet some predetermined conditions. Additionally, attorneys can draft effective representations and warranties, indemnification clauses and breach provisions to cover situations when the other party does not perform its obligations. However, these should be used as a failsafe and do not replace comprehensive due diligence, as their enforcement requires expensive and time-consuming lawsuits.