So, you’re thinking of buying or selling a business. It’s exciting – and it’s a huge milestone in your life… but be careful, there are some common mistakes that are made in the rush of excitement and opportunity. Namely, it’s the rush part of the equation.
In today’s economy, businesses, particularly small businesses, are starting to see a renewed growth, and that means there’s opportunity for sellers to cash in on the equity they’ve built in their business ventures and an opportunity to take advantage of continued growth for buyers. However, given all this fervor, it also means that the details can get lost in the mix. No, it isn’t necessary to involve brokers and attorneys, but it can certainly be helpful. For the purpose of this article, we’ll let the brokers give their advice. But, from an attorney’s standpoint, there are 6 common missteps we see business buyers making – from the first-time buyers to the seasoned buyers.
Rush to Closing
The most common mistake we see as attorneys are buyers coming to us with unrealistic closing dates because they are afraid the seller will find someone else. Of course, the seller wants a quick closing date. And, they would really love it if you paid cash and asked no questions. But, that’s also how you end up in an attorney’s office months later wanting to sue the seller saying that you got swindled (when you probably didn’t). The buyer should plan for a realistic closing date that allows for due diligence to take place. Due diligence depends on the purchase and the industry, but generally, you want to allow at least 1-2 months on the short side with potentially 2-3 months if the due diligence is more complicated. You want to see financials, get records, dig into any potential liabilities (EVEN IF IT IS AN ASSET ONLY PURCHASE), check out the vendors, and look into as much about the business as possible. This is where a team consisting of an attorney, accountant, etc. can come in very handy. Importantly, to overcome the fear of losing out on the deal, you can create contracts that solidify the intent to purchase. This can be through a separate agreement or can be incorporated in the overarching purchase and sale agreement that details the timelines and events of the purchase, including the closing date.
This is a common mistake of new buyers especially. But, even a seasoned buyer can fall into this trap if they are new to the industry or even the area of the business. To overcome this misstep, it is helpful to negotiate a transition period where management will provide some training and consultation to the new buyer. Often, this is thrown in as an incentive – usually for a short period of a couple weeks, maybe a month. If the buyer needs a longer transition, many will look to compensate the outgoing seller to keep them on as a consultant for a time period of any where from a couple months to a year.
Don’t make assumptions about what you are purchasing. If the business has inventory, it needs to be outlined and in an agreement as to what is included. The last thing you want is to close and find out you have no inventory when you assumed you purchased it. Likewise, in a service industry, if you are buying a business for the clientele, make sure it is included and make sure you have some sort of non-compete agreement in place so that you are protected from being sold a book of business only to have the seller open up down the block under a different name and start taking their old clients back.
Again, no assumptions – if you are buying the business with the intent to use their systems and the goodwill of the name, make sure you are purchasing all of it, including things like licenses, the website, logos, etc. This is often overlooked and just assumed. Many successful businesses are successful because of their intellectual property and the systems they have in place. Make sure you have a written agreement as to what it is you are purchasing. And, with names, make sure the seller has the ability to sell the name and make sure you have preventions from the seller opening back up with the same or similar name.
Not all contracts just switch over because you buy the business. Likely, most will, but some may have things like personal guarantees where you will need approval of the other party to assume the terms of the contract. And, for some vendors and/or suppliers, you may want to renegotiate the terms depending on how you intend to run the business. These negotiations can be complicated, so it is helpful to have an attorney on your side that can review these agreements and advise you as to the terms and facilitate transfers. One of the most common transfers is getting the landlord to transfer the lease to the new buyer. Just as often, this is an opportunity to negotiate new terms. This is tricky territory so be careful, but just make sure it is addressed early because these transfers and negotiations take time.
Not reading the sales agreement
Finally, let’s say you’ve followed the overarching advice and hired an attorney to draft up a beautiful purchase agreement. So, what mistake can you make, right? Well, the big mistake is failing to actually read what the attorney wrote… and, more importantly, to ask questions where you may not understand what the agreement says. As attorneys, we tend to use jargon – if your attorney puts something in your purchase agreement you don’t understand, ask him/her to explain and see if there’s a simpler way they can word it. Also, make sure what is written is what you actually want in there. Your attorney is there to advise and to facilitate – at times, that means providing suggestions. Suggestions are just suggestions, you need to understand and agree to the substance.
In the end, buying a business is a very exciting event in your life. It should be a great experience, and it can be with some attention to detail. If you assemble the right team of advisors to guide you through the process, and you avoid the common missteps, you’re well on your way to a successful purchase and great new business venture.