Buying a business often involves the simultaneous closing of three separate but closely related transactions:  (1) the purchase of the business, (2) the financing of the acquisition, and (3) the business management and ownership agreement among the co-owners/co-purchasers.  While many entrepreneurs know how to operate a business, many also need assistance in handling any or all of these matters.  What happens during each of these transactions will have a direct effect upon the success, perhaps even the ability to survive, of the business being purchased. 

Each business acquisition comes with its own unique challenges, some very complex and others routine, involving business, legal and interpersonal relationship issues.  To have the greatest likelihood of handling these items properly, and of success in the purchase process and ownership of the business, it is in the best interest of the buyer(s) to engage the services of professionals such as an accountant, a lawyer and/or other qualified consultants and advisers with significant experience in the purchase of a business…..the buyer’s acquisition team.  Below are some important considerations and steps a buyer should take in making the decision to purchase a business.

Due Diligence:

Due diligence is the legal term for a careful evaluation of all aspects of the business or assets to be acquired.  A buyer, with the assistance of  its professional advisors, should create a due diligence checklist and a list of questions and issues that need to be answered and resolved to the buyer’s satisfaction as the buyer reviews and gains a better understanding of the business.  The purchase Contract must provide that the buyer has a reasonable opportunity to conduct its due diligence before being bound to close the deal.  Also, the due diligence must be completed, and the results thereof reviewed and analyzed, before the buyer is fully bound to complete the transaction so that the buyer, if dissatisfied, can terminate the deal.  Below are a few examples of common due diligence inquiries:

• Are there critical employees, assets, and/or accounts without which the business would suffer or even fail?  How will buyer protect itself on these issues upon the closing of the business purchase? 
• What is the recent financial history of the business?
• Any competition issues?
• Is the price being paid for the business the “right” price?
• Why is the business for sale?  Does any other party have a priority right to purchase it?
• What are the cashflow, equipment, personnel and other needs of the business to operate successfully?
• What is actually being purchased: inventory, equipment, raw materials, accounts receivable, contracts, a client list, a customer list, a lease?
• What is the condition of the assets being purchased?
• Are there any environmental concerns?
• Where will the business operate?  Is the business’ current location critical to its success? If under a lease, what is the status of the lease and the condition of the premises?
• Are there any lawsuits, claims, or judgments against the business or its assets or the existing ownership?
• Are there any liens on the assets being acquired?
• Are there any restrictions on the business?
• Are there any tax issues for the seller? For the buyer?
• Are there any non-compete and/or non-disclosure issues to be addressed? 

Financing Considerations:

If the purchase is to be financed, then the purchase Contract must provide that the buyer has a reasonable opportunity to apply for and obtain a binding commitment for such financing.   The buyer must diligently pursue such financing as obtaining a loan commitment can take some time, and closing on the financing may be a challenging process to the buyer, especially if the financing is being provided through a special governmental program such as an SBA loan, such as the 7(a) or 504 loan programs.  Also, while an established customer list, a brand name, a great location, and an exclusive territory maybe crucial to the success of the business, these may not be of much value in securing financing.   A business in which the most valuable assets are the personality, relationships, experience and skill of the seller also do not make lenders rush to finance the purchase of a business.  On the other hand, assets such as real estate, equipment, accounts receivable, inventory and unique technology (such as patents) are the type of assets that can be pledged to a lender to secure an acquisition loan.

Management of the Business:

Before purchasing the business, the buyers should have a solid understanding of the choice of entity to operate the business, who will own such entity, who will run the day-to-day affairs of the business (e.g., the officers or managers), how the officers or managers will be compensated and incentivized, and how the owners will monitor the officers or managers.  Also, the buyers need to agree on what powers the officers and managers will have and what restrictions there will be on such powers.  Other considerations include whether there will be a covenant not-to compete or some other legal mechanism structured to keep the managers with the business at least while acquisition financing and related personal guarantees remain outstanding.  It is best that the buyers handle these and related ownership issues through a written document such as an Operating Agreement for a limited liability company, a Shareholders’ Agreement for a corporation, or a Partnership Agreement for a partnership.  Some of the issues to be addressed in such an ownership and operating agreement include:

• Who will run the day-to day business?
• How will the entity’s disbursements be handled?
• Are the owners allowed to make loans to the business?  If so, under what terms?
• Who decide when to borrow money or buy other assets and business?
• What restrictions will exist on the owners right to sell their ownership interest in the buying entity?
• What protections are provided to minority owners?
• What happens when the owners disagree?
•  What happens when the an owner dies or is permanently disabled?
• What is the “exit strategy” for the owners?
• Arew there any covenants not to compete?  Any non-disclosure agreements?
• Are there any “buy in” or “buy out” terms?  If so, how will same be  financed (through insurance, for example)?

Set up the Buyer’s Acquisition Team:

Buying a business involves many risks and, to be done most successfully, requires an experienced team of professionals and advisers to assist the buyer through the purchase process.  Each member of the buyer’s acquisition team should bring the right amount of skills, training and expertise to enable buyer to properly work through the purchase process:  an attorney experienced in buying businesses to recognize the critical issues and risks and help the buyer navigate through them; a banker, investment banker or a business intermediary / broker to assist in obtaining acquisition financing and, if desired or needed, equity investment; and an experienced accountant to review the tax returns and financial statements of the business and work with the lender.  The buyer must also include an experienced commercial insurance agent on its team as lenders, landlords and even some customers will require specialized insurance policy information. Finally, if the buyer is not familiar with the particular industry of the business it wishes to acquire, the buyer may need to retain a business consultant knowledgeable about that specific industry and the business being acquired.  Setting up the proper acquisition team at the right time is often the difference between success and failure for the buyer.