Legal Considerations When Buying A Business
If you’re buying a business, congratulations are in order. This is a big decision, and hopefully, a great start to a new and productive financial future for you. But buying a business doesn’t involve only business decisions. It also involves a lot of legal considerations as well.
What are You Buying?
The first consideration is what to buy—buying “the business” doesn’t tell you this. Are you buying the business itself—that is ownership of the business, stocks, and intangibles—or are you just buying the assets of the business? There are legal considerations for both options, but whatever you choose, make sure you understand which you are doing, and what the pros and cons of both are.
A large part of buying a business is doing what is known as due diligence. As a general rule, you cannot hold the seller of the business responsible for unforeseen problems with your newly purchased business if you fail to do your due diligence.
Doing due diligence can require a lot of moving parts. You may need to sign a nondisclosure agreement, promising that if you don’t buy the business, you will keep secret whatever you learned investigating the business.
You may need experts to help you do due diligence. You may not have the ability to analyze a company’s financial documents or to assess the mechanical viability of the business’ machines, or to see if there are liens on property or a leak in the roof, but an expert can.
What to Inspect
What kind of things should you look for, when ascertaining whether you want to buy a business or not? There is no “one size fits all” when doing due diligence, but here are some general categories for investigation that every purchaser or a business may want to look into.
Tax Returns – Tax returns present a telling story of a company’s financial situation. And no, don’t give heed to sellers who say tax returns are inaccurate because they are a “cash business.”
Financial Statements – Financial statements should be audited, or at least verified by a third party. Don’t give much attention to self generated, self audited statements
Accounts Receivable and Payable – Do customers or other entities owe money to the company? What is outstanding and why hasn’t it been paid? Conversely, who does the company owe money to? These numbers often haven’t hit the bank account records just yet, but they can paint a realistic picture of a company’s present and future financial situation.
Physical Goods and Inventory – What is the condition of the company’s inventory? What about its machinery or vehicles? What is any of it actually worth? Do any of these need imminent repair or replacement?
Fixes List of Assets – You should have a list of the tangible, physical assets that the company is selling, which should be signed by the seller.
Legal Documents, Liability and Lawsuits – Is the company suing anybody, or is it at risk of being sued? Are there any claims pending, which could turn into lawsuits? Additionally, all legal documents, like leases, purchase orders, restrictive covenants, or supplier contracts, should be reviewed.