Purchasing a business should rightly be viewed as a process, rather than a one-time event. There’s too much at stake – your money, your time, and other opportunities you’ve chosen to forego – to rush through buying even the most appealing and profitable business. Our clients come to us seeking legal guidance from our Business & Corporate teams. We come together to plot a course from start to finish to help ensure you make the right decision and get the best value for your investment.
Step 1: Find the right business
Opportunities to buy businesses likely will not come knocking. It will be up to you to do the research necessary to find not only a business to buy but a good one. The owners may not even be marketing the business for sale or expressing any interest in letting their company go. Nonetheless, you should look for a business that checks off the following boxes:
- Is in an industry you are familiar with
- Demonstrates positive cash flow, or the potential for it
- Has a strong and dependable customer list
- Has a clear plan for long-term growth
Don’t forget to find a business that you could see yourself enjoying, without overcommitting yourself or neglecting your family or personal life. It’s also a good idea to have more than one potential company to buy.
Step 2: Value the business and negotiate a price
Before you can buy a business, you need to know what it’s worth. It helps to purchase a business in an industry you already know, so you have some idea of its value. But even then, you may need the assistance of an appraiser. Whether you conduct the valuation yourself or hire a professional, the process will take into account business revenue, net income, or earnings before interest, taxes, depreciation, and amortization (EBITDA).
Once you’ve ascertained a reasonable value for the company, it’s time to negotiate a price with its owners. This will typically kick off several rounds of discussions before you and the owners arrive at a tentative price.
Step 3: Determine the structure of the purchase
Business purchases can happen in one of several ways. The three most commonly used structures are:
- Merger
- Stock purchase
- Asset purchase
There are tax, liability, and other important considerations with each of these. For instance, with a stock purchase, a new owner can step into existing operations with minimal interruption. Ask an experienced attorney which of these purchase options is best for you.
Step 4: Letter of intent to buy the business
The letter of intent is a non-binding agreement between you and the company’s owners that outlines the basic terms of the prospective purchase. It will cover prior negotiations including the price, deal structure, and due diligence requirements (see below). The letter can be drafted in a way to give you the exclusive right to purchase the business within a certain timeframe, without legally obligating you to do so.
Step 5: Due diligence
Due diligence is like an investigation, in which you are trying to ascertain the true value of the business. That includes uncovering anything that could create a liability and thereby lessen the company’s value, such as pending or active litigation, regulatory investigations, or tax problems. Understanding the risks facing the business will help inform you not just of the company’s true value but of certain terms you may want included in the final purchase agreement.
Step 6: Purchase agreement and closing
Finally, the detailed purchase agreement terms will be drafted, negotiated, and signed. Having an attorney throughout the process of buying the company is strongly advised, but you absolutely need one to draft this all-important contract. There may be consents and approvals you have to obtain from third parties, like stockholders or the board of directors. Anything uncovered during due diligence may also need to be addressed in this agreement, such as including indemnification for liability.
After the purchase agreement is signed, the deal is closed and ownership is transferred. Certain records will need to be exchanged, such as stock certificates. So, too, will the purchase funds from you to the former owners. An attorney can explain other post-closing steps you will need to take.
Remember, there’s a great deal at risk when it comes to buying a business. You deserve knowledgeable legal counsel looking out for your best interests. Ready to get started? Reach out to SederLaw to connect with our Business & Corporate team.