4 Things To Consider When Buying a Business
When buying a business—whether it’s a service-based business, a retail store, or a business that focuses on manufacturing—there are numerous factors to consider when structuring and negotiating the terms of the deal. This process can be overwhelming, especially for first-time buyers. Even seasoned business purchasers can sometimes overlook critical red flags in their eagerness to finalize a deal to purchase the business they are interested in.
Several key elements require careful consideration when acquiring a business. Specifically, you need to pay close attention to the structure of the transaction, valuation, financial and legal due diligence, and financing options, among others.
Legal documents are crucial in safeguarding the interests of both individuals and businesses. Before signing any such document, it’s essential to ensure it doesn’t impose unnecessary risks. Having an experienced business lawyer review all of the documents involved is vital, as they can identify potential issues that could impact your finances, responsibilities, and time overall. Your lawyer should review any agreement, contract, or document, even those that don’t require a signature, to ensure your interests are protected. They’re like your eagle eye when it comes to identifying risks. In your excitement it’s common to overlook small details but, your lawyer will go over everything when keen attention to detail, because finding errors, and preventing issues ahead of time, is their speciality. There are 4 specific questions you should ask yourself before moving forward with any purchase and it’s smart to discuss your thoughts on each of these, with your lawyer so that you can come up with a buying strategy together. Two heads are better than one after all.
1. Is This an Asset Or A Share Business Purchase Transaction?
A purchase transaction can be structured as either an asset or a share transaction.
In an asset transaction, you have the flexibility to select specific assets you wish to purchase and you choose the specific liabilities you are willing to assume.
In contrast, a share transaction involves acquiring the shares of your chosen business, along with all of its assets and liabilities, both known and unknown. The discovery of unknown liabilities later on can significantly impact your operations. To mitigate these risks, it’s crucial to negotiate certain legal protections and to seek advice from your lawyer along the way.
Given the different levels of liability risk associated with each structure, sellers may ask for a higher purchase price in an asset transaction, while buyers might seek a lower price in a share transaction along with certain protective representations, warranties, and indemnities.
Additionally, each structure has distinct tax implications. It’s important to discuss these tax issues and their implications with your tax and accounting advisors before finalizing any offer to purchase.
2. Is The Valuation Of This Business Fair?
Determining the valuation of the assets or shares of your target business requires careful consideration. Key factors to take into account when determining the purchase price include:
- Historical financial position (including revenue cycle and profit history)
- Future profit potential
- Condition of the business and its assets
- Tax consequences
- Risks and potential liabilities
- Economic conditions
Each of these factors can significantly influence your understanding of the actual current and future value of the business you intend to purchase. It is advisable to use conservative assumptions and estimates in your evaluation so as not to over-inflate the value.
To ensure accuracy, seek the assistance of accounting and tax advisors. Additionally, consulting a corporate or business lawyer is essential to understand the legal complexities and to safeguard your interests throughout the valuation and purchase process. An experienced lawyer will have participated in the purchasing of many businesses over the years and you can lean on that experience to ensure you’re getting a fair deal.
3. What Is Covered By Due Diligence When You Buy A Business?
Along with conducting financial investigations for your potential business acquisition, it is crucial to perform specific legal investigations before finalizing the transaction as well. These should include:
- Inspection of corporate records and commercial agreements
- Verification of the sellers’ status and residency requirements
- Property searches (both real estate and personal property)
- Litigation searches
- Examination of labor and employment matters
- Review of tax matters
- Identification of required consents, approvals, and/or notices
Inspecting these corporate records and agreements ensures that the business has the necessary licenses and registrations to operate. If these are not in good standing, it could impact your ability to continue the business even if you did finalize the purchase not expecting to run into these challenges.
Verifying the existence of the target company is also essential. For example, if the business has been dissolved due to non-compliance with filing requirements, this could delay the closing as the necessary documents would need to be filed.
Property searches are necessary to determine the ownership of the business’s assets and to ensure they are free from encumbrances. Depending on the situation, you may need certain encumbrances to be discharged before closing.
Litigation searches reveal any legal matters involving the business. This information allows you to investigate the rights and obligations that could affect you after the closing.
Additionally, it is vital to identify any outstanding tax liabilities of the business. Ensure the purchase and sale agreement addresses the repayment of these taxes or that adequate reserves are made to cover any expenses.
Conducting extensive due diligence is an effective way to limit risks. Liabilities discovered during these investigations can be addressed through negotiation, with the assistance of your business or litigation lawyer. As you might have expected purchasing a business isn’t a quick transaction so be sure to allow yourself time to carefully access each area appropriately. You don’t want to rush the process and regret it later.
4. What Else Should Your Lawyer Review When Buying A Business?
Having a lawyer review your business documents can save you time and money in the long run. They can help you identify potential pitfalls and negotiate terms in your favour.
Additionally, business lawyers can provide a fresh legal perspective on your situation. Business owners often view legal documents through the lens of marketing, loss, profit, or similar factors, whereas lawyers assess them without the competitive business pressures that can be distracting.
As you might imagine it’s essential to ensure that any document you’re about to sign is in your best interest, particularly when it comes to business contracts presented by other parties. Another lawyer likely drafted the contract to protect the seller’s interests, not yours. Having your lawyer review the agreement will ensure your interests are equally protected.
When you’re looking at purchasing a business, have the following business agreements and contracts reviewed by a lawyer: service, supply, technical, and franchise agreements; confidentiality, tri-partite, procurement, marketing, and employment agreements; as well as any leases or contracts held by the business.
An Experienced Business Lawyer Can Ensure Your Business Acquisition Is A Smart One
Your legal advisors can help you identify and address both potential opportunities and risks associated with buying a business. It’s essential to ensure there are no loopholes or areas of confusion anywhere in the text of the legal documents. If you’re planning on buying a business or starting a new one, give Hukam Law a call. We have the experience and expertise you can rely on to make sure that your business acquisition is done properly while avoiding future legal repercussions. To get started reach out to us at 705-915-0884 or send us an email: info@hukamlaw.ca. Together we’ll talk through your ideas, review all the details, and have the paperwork taken care of accordingly.
***The information provided in this blog is for general informational purposes only and should not be construed as legal advice. If you have legal questions, we strongly advise you to contact us.