Things to consider when buying a business
Sometimes it is a better to buy an existing business than start a new one. Ask the owner why the business is for sale.
The reason for sale will help you figure out whether to buy the business or not. For example, the owner may want to retire even though the business is profitable. Buying this business may make sense. If the owner tells you the business is losing money, ask yourself if you can expect to succeed if the present owner is failing?
Do I need a contract with the owner to purchase a business?
Buying a business is like buying a house. Once the parties have agreed on the sale price, they enter into a written contract. The contract should state the sale price and date of sale of the business. A handshake between the owner and you is not enough. A bank needs to see a contract to lend you money.
You also need a written contract to state what equipment, inventory and other assets come with the business and other important terms and conditions.
Contracts can be simple or complex. You need a lawyer or other professional to help you draft and bargain the contract. This will cost you some money, but it is worth it.
Terms to include in a contract to buy a business
A contract must have the price of the business and how it is to be paid. For example, one half might be paid at the closing and the other half might be paid to the owner in monthly payments.
The contract should give the buyer a period of time (such as 30 to 60 days) to review the business along with the right to cancel the deal if the owner said something untrue or if the buyer finds something not seen when the contract was signed.
It is common to state in the contract that if the buyer is unable to borrow money to buy the business, the deal is off.
If you have questions about the contract, it is important to see a lawyer.
Due diligence before buying a business
Due diligence is the term used to describe the investigation of the business by the buyer between the date the contract is signed and the date of the closing.
It is important to review the finances of the business and consider the following:
- Is it profitable?
- Have all business taxes been paid?
- Are there books and records that honestly reflect the financial condition of the business?
- Is there a good mix of customers or do one or two customers account for almost all of the sales?
Most contracts allow the buyer to cancel the deal if there is a major change in the seller’s finances or if any of the financial statements were wrong between the date the contract is signed and the date of the closing.
Potential liabilities of a business are important to know. These include:
- Lawsuits or threatened lawsuits
- Pending government investigations
- An argument with the landlord
- A failure of the seller to obtain a required license or permit
- Anything likely to cost money to resolve.
The relationship between the owner and employees is also important important. Will a key employee leave if you purchase the business? Has the seller made promises to employees that the new owner will have to honor?
There is nothing wrong with asking the owner to tell you everything you want to know about the business. If the owner does not want to, there may be something to hide.
Who needs to approve the deal to finish buying a business?
Almost every purchase of an existing business requires at least one third party approval and usually more. Here are some of the more common:
- If the buyer is borrowing money, the bank must approve the deal;
- If the business is operating in leased space, the landlord must approve the new tenant;
- If the seller has a contract with a supplier, a distributor or a major customer, the buyer may be unable to use this contract without the consent of these people; or
- Licenses and permits held by the business may not be transferred to a new owner without governmental approval.
These are examples only. Be sure to think carefully about everything the business needs to run. If it seems like you need the consent or approval of someone after taking over the business, state in the contract that you can cancel the deal if there is no consent or approval.
Closing a business purchase
The closing usually takes place at the business office, in a lawyer's office, or at the bank if it is lending money to the buyer. If both parties have done everything they agreed to in the contract and all the papers have been prepared in advance, the closing should take no longer than one hour to complete.
If things are not ready, you can request that the closing be delayed a few hours or even a day or two until all required actions have been taken. Do not be pressured into closing if important things remain undone or papers have not been signed.
When the closing is ready, the buyer gives the seller a certified check for the amount due on the purchase price. The buyer is the new owner of the business.