Owning and operating a business, being your own boss, is an inextricable part of the American Dream. It’s no coincidence that a particularly common mantra for politicians—both Democrat and Republican—is “small business is the backbone of the American economy.” And it’s true. According to recent data from the Small Business Association, small businesses account for 99.7% of firms with paid employees.
For many people, the most obvious road to business ownership is to start their own business. While this can be a profitable route, it takes time, money, effort, and some luck. With all of these obstacles, it’s not a surprise that nearly 50% of startups fail within 5 years. If we extend out to 10 years, that number jumps up to nearly 90%!
When done right, buying a business can bring the same financial and personal benefits of a startup, but, importantly, it can also be less risky. According to a 2016 SBA study, the chance that an entrepreneur who buys a successful, existing business will still be in business after five years is 90–95%.
Buying an existing business brings a number of potential benefits:
By opting to purchase a “going concern” business, you can avoid creating a new idea for a product or fighting for some small percentage of an industry’s market share. A going concern business also has equipment, employees, and an existing customer base. For the most part, you can step right in and operate it.
There are many steps to purchasing a business—there’s a reason we call it a process. In very broad strokes, the process goes as follows:
☑ Find a suitable business. This step will involve introspection on your part. Different industries require different technical capabilities and business skills, and you don’t want to invest in a business area that you don’t understand. You also need to decide what type of lifestyle you want the business to provide. After you’ve decided what type of business you want to find, you need to actually find it. To do so, you will probably work with a business broker, who will engage in a search for businesses that meet your criteria.
☑ Preliminary investigation and initial offer. Once you or your broker have identified a promising business but before making an offer, you’ll need to do an initial investigation of the business. The seller will provide you with background information about the business (e.g. the types and amounts of assets being sold, industry statistics, and recast financial information). If done properly, with professional advice, this step will save you from wasting time and effort on a full-blown due diligence investigation before you know whether you and the seller can come to agreements on basic issues of sale price or payment terms. If everything looks in order, you will make an initial offer.
☑ Due diligence. Before the deal closes, you must conduct a detailed and extensive investigation. Due diligence is an absolute necessity for any business purchase, and, no, it is not just a financial review. The goal is to uncover any risks or dangers that might be lurking behind the curtain. You will request various corporate or limited liability company documents, contracts or agreements that the business has entered, and employee-related documents; you will also assess the full financial records, lease terms, business competition, internal systems and processes.
☑ Prepare and sign contracts. After the due diligence has been completed, you will draft, negotiate, and sign the purchase contract and any other transaction documents. This step is vital to your transaction and should not be tackled alone. Once you’ve signed the contracts, you are locked into the terms of those contracts—for better or worse. You should work closely with an experienced business attorney to ensure that these contracts are comprehensive and properly protect you and your new investment.
☑ Third party approvals and consents. Part of the final sale process involves contacting other parties that may have a contract with the business. Depending on the legal structure of the business you’re buying, you may be required to contact and gain written approval from parties that have licensing agreements with the business, clients with existing contracts, and the landlord. The laws governing the particulars for each business entity differ, and you should work closely with your business attorney to ensure that you comply with any third-party obligations you might have.
☑ Close the deal. The closing is the final step in the purchase process where both parties meet to countersign the contracts and other documents that you’ve negotiated throughout the process. All the provisions are reviewed before the parties sign the papers.
The process of buying a business requires a unique set of skills, or rather, multiple sets of skills. Your skill set is business acumen, which is an absolute necessity to run the business effectively. But are you also a financial wizard, legal professional, and real estate tycoon? Probably not.
Throughout the purchasing process, there will be legal minefields to navigate. You could face intricate securities requirements or complicated contractual provisions that require a skilled legal mind to manage. Going either of these alone can spell disaster for your deal or for its ultimate benefits to you.
Your business attorney will assist at every point in the transaction. Principally, he should be part of the initial offer, he should negotiate and prepare the contracts for the purchase to ensure that each document is legally sound, comprehensive, and reflects the unique aspects of your purchase, and he should close the transaction with you.
When you buy a business, what you want is a legal advisor with real-world business experience, who can learn about and understand your business interests, and who will give you practical advice to help you accomplish your business objectives.
Fortunately, here at Alexander Abramson, we focus exclusively on business-related legal matters. We have advised closely held businesses and business professionals for 25 years at every step of the purchase process. We can work with you through the course of the purchase process to help you understand and mitigate your legal risks, negotiate and draft the transaction documents, and close the deal.
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