Buying a Business
Every entrepreneur dreams of owning a successful business. However, many people do not want to take the risk of starting a business from the ground up. As an alternative, you can buy an existing business.
People buy businesses for a variety of reasons. It is easier and faster than starting a company from scratch. The assets, suppliers, and consumer base already exist. Also, banks and other lenders are more likely to offer you a loan for an existing business.
However, there are still many complications that can arise. This article examines the major legal issues that can occur if you decide to buy a business.
The most basic aspect of buying a business is that you are making an agreement to take ownership of a business. This might sound like a no-brainer, but the buyer should understand what exactly he or she is purchasing and should include every detail in a written contract.
Before signing an agreement, you must carefully verify the seller’s information. Lawyers call this “due diligence.” Look at the company’s financial and legal records. Do their financial statements match the reality? What is their projected outlook for future growth? Are they in debt? What kind of contracts do they have with suppliers? Are there any copyrights or patents? If you’re buying a bar or convenience store, do they have a liquor license?
Don’t be afraid to ask these questions. If the seller is less than forthcoming with the answers, ask yourself why they want to sell the company in the first place. Hiring an accountant and an attorney to double-check the numbers and the paperwork will save money in the long run. If you prefer to keep your findings secret, a confidentiality agreement will keep lips sealed.
There are two common mistakes buyers make when closing a deal. First, the Internet makes it easy to assess a company without ever visiting the business. If the company is online only, that’s understandable. However, if the company has a brick and mortar building, you should definitely make a physical inspection. Checking for building code violations is helpful, but making a physical inspection allows you to interact with customers and employees in person. If you plan to take over, meeting the people who will make you money is crucial.
The second mistake is that some buyers will fall in love with the business and ignore all the risks. Buyers sometimes ignore risks even if they have carefully run the numbers and found that the business isn’t as profitable as it first appeared. If you find yourself ignoring all the potential downsides, look for a second or third opinion. The law protects against fraud and misrepresentation, but it does not offer protection from bad business decisions.
One way to assess risk is to examine the type of business insurance the seller currently has. Checking insurance allows you to become familiar with the company’s insurance policies and allows you to assess what types of legal risks might occur. A manufacturer typically carries product liability insurance. Professional firms, such as real estate brokers, attorneys, dentists and doctors use malpractice insurance. Delivery services will have automobile insurance.
In the rare case that the business doesn’t have any form of insurance, check if they are breaking any laws. For example, many states require professional firms to purchase malpractice insurance, unless they hang a sign outside their office stating they don’t have insurance (one more reason to make a physical inspection). Likewise, starting in 2015, employers with 50 or more employees are required to offer health care insurance to their employees.
If you buy the business, there are two crucial employment questions: can you terminate an employee and can you retain an employee? Look through employment contracts, if any, to check the terms of employment. Even if a business changes ownership, the employee can still retain her job through a contract. Otherwise, the new employer is free to terminate employment at-will.
Employees who feel they were mistreated by new management will sometimes start their own business – near their former workplace. Therefore, buyers should also check employment contracts for non-compete clauses. Non-compete clauses prevent former employees from directly competing with your newly acquired business. You should also consider negotiating a non-compete clause into the contract with the seller.
Although at-will employment typically favors the employer, business acquisition is one situation where the employer is at a disadvantage. This is important to understand in instances where you are purchasing a business partly for its staff.
If the buyer wishes to preserve staff, the buyer should treat the employees well before the deal is made. Although good will alone won’t keep employees from walking out the door, it does set the stage for employment contracts. Employment contracts can prevent employers from firing employees; they can also bind employees to the company. However, convincing an employee to stay with a company, despite the change in ownership, will often result in terms which will favor the employee.
Alternatives to Buying a Business
Even if you are determined to purchase an existing business, you should take a step back and consider the alternatives. The reality is that not every business will be worth buying. Moreover, not everyone is prepared to run a business alone.
Here are three ways that you can run a business without completely committing to buying it outright:
- If the costs and stress of buying a business is overwhelming to you, consider buying the business with a person you trust. Although you won’t have full control in a partnership, you won’t have to go into business alone.
- Consider leasing the business with an option to buy. You can “test drive” the business for a period of time and then you can purchase the whole thing if you find the experience worthwhile. Finding a seller who is willing to lease with the option of buying will not be easy, but this is a common business tactic.
- Consider purchasing a franchise. This can be a realistic option if you would like to have promotional support from a parent company.
Peter Clarke, JD, is the content manager for LegalMatch.com in South San Francisco. He can be reached at email@example.com.