Buying an established small business can be an attractive proposition. Often times, the seller is a seasoned and successful owner who has personal reasons to cash out. Rather than taking a risk on an unproven concept, the buyer can quantify the track record of earnings and the pipeline of sales which will bring near-term revenue. Could it be a match made in heaven?
The essential legal questions are:
1. How is the business structured?
Whether the business is a corporation, LLC, sole proprietorship, or partnership is a foundational issue that will need to be fleshed out with other organic documents such as bylaws, operating agreements, and minutes. As the negotiations progress, changes to this foundation can be considered.
2. What is being purchased and by whom?
There are any number of issues that arise from whether the buyer is acquiring assets or corporate stock (also called “units” for LLCs). These run the gamut including control, liability, tax treatment, and ramifications for licenses, permits, and financing to name a few.
3. What are the buyer’s goals?
It’s often said that anything worth doing is worth doing right. This is perhaps the most personal set of decisions facing the buyer regarding her or his involvement, talent, lifestyle, and appetites for independence and risk. Sometimes the target business is a step up from what the buyer knows; sometimes the buyer feels very comfortable with the scope of current activities and is geared towards growth.
4. Will the seller continue on in the business for a transition period?
Obviously, some buyers want turn-key; others want to develop a relationship and set some timetable for a smooth transition where the seller is available – and compensated – to ensure the success of the business after the sale.
5. What should the buyer expect from the due diligence process?
A lot. Due diligence is more than a chance to look under the hood. Identify strengths, weaknesses and needed changes. Decide who is responsible and when the change should be initiated and completed.
6. How will financing considerations play into the deal?
Few buyers show up with an all-cash offer. Most buyers will rely on some combination of personal resources, bank financing (possibly backed by the Small Business Administration), and a willingness to personally guarantee any loans taken out to purchase the business. Expect scrutiny and strings to be attached to the funds.
7. What is the buyer’s exit plan?
Though last on our list and not something most people like to think about at the beginning of a relationship, the desired exit plan is a key driver to many of the important legal and tax consequences the buyer will face in the future. Now is the time to protect the buyer’s investment and take advantage of options that may before foreclosed if they are unknown or undecided at closing.
Keeping an Open Mind.
While the questions may seem sequential at first glance, many first time buyers and sellers are surprised to find out how much of an iterative process the negotiations may be. Both the buyer and seller with be producing documents and information for the other side to evaluate. The lender is likewise evaluating both the buyer and the seller.
Be prepared to engage at least a lawyer and an accountant who are well-versed in businesses of the same size. Both professionals should be familiar with the laws and tax practices of the jurisdiction where the business is located and also where the buyer is located if the buyer is in a different state.
Thinking about buying a small business? We’re here to help!
