5 Tips for acquiring an existing business
Building a business is hard, time consuming work, which is exactly why buying an existing business is so appealing. Not only can give you the opportunity to hit the ground running with a turnkey operation, the established customer base, reputation, and employees who are familiar with all aspects of the organization makes acquiring an existing business is often less risky than starting a business from scratch. And when taking over an operation that’s already generating a cash flow and profits, most of the “dirty work” has already been done. Of course, there’s no such thing as a sure thing, and buying an existing business is no exception.
If you are seeking to purchase an existing business, the following tips will help you to make the right decision, and optimize your chances for success.
1. Build Your Team. Prior to engaging in the acquisition process, consult an independent attorney and accountant to assist you in performing your due diligence, meaning the review and verification of all relevant information about the business you are considering purchasing. Having a trusted ensemble of professionals will help to ensure that your decision to purchase is the right one.
2. Do Your Research. Taking the time research your potential purchase before making an offer is a must. In order to access the information necessary to perform a thorough due diligence, a letter of intent stating the intended terms of purchase and conditions for sale, as well as a confidentiality agreement stating that you will not share the seller’s information, should prepared and executed between the parties. A proper due diligence will include a review of the following documentation:
Leases: Is the business location, on-site machinery or equipment being leased?
Contracts: Are there any pre-existing agreements with outside vendors or any other instruments that legally bind the business?
Financial Statements and Tax Returns: Evaluate all books and financial records from the last five years and compare them to their tax returns.
Critical Company Documents: Employee contracts, customer lists, monthly sales records, and a list of tangible assets, such as furniture, equipments and fixtures.
Licenses, Permits, and Zoning Requirements: Are these up-to-date and valid? Are there any environmental concerns?
3. Closing the Deal. If you’ve thoroughly investigated a company and wish to go ahead with a purchase, there are a few more steps you’ll have to take. First, you and the owner will have to agree on a fair purchase price. Hiring an experienced appraiser will help you in attaining a value that is fair. Next, you and the business owner will agree on which assets you’ll buy (such as a building and equipment) and the terms of payment. Once the terms of sale have been agreed upon by the parties, you will need to create a written asset purchase agreement. Be sure not to overlook the acquisition of certain digital rights, which will include all website domains, social media handles, usernames, passwords, emails, and any other digital resources that may be aligned by consumers with the already established brand.
4. Business Structure. Upon closing on the purchase of the business, one of the first steps to take is evaluating the legal structure of the business. Is it an LLC, a Corporation, an S-Corp? What are the different legal, tax and record keeping requirements of the current structure? Do you need to change the structure under which the business was formed in order to suit your needs?
5. Update Legal Documents. Often businesses that are sold were previously owned by individuals who have been around for decades, causing many of the systems in place upon acquisition to be “old school” in nature. As such, it is also important to make sure that certain legal documents, such as Employment Agreements, Employee Handbooks and Vendor Agreements are up-to-date with terms in place that will protect your business from those pesky modern day liabilities.
The purchase of an existing business, for some people, can be the better option than starting from the ground up. While there are many appealing aspects, acquiring a pre-existing business doesn’t come without its risks. Having a proper understanding of a business’s value and liabilities is essential, and can be the difference between success and failure and an attorney experienced in corporate and commercial transactions will give you the necessary professional insight to make your decision with confidence. Contact us for more information.