Business relationships are like personal relationships—they often start with people being enamored with each other. But just as it is generally not a good idea to run off and elope with someone after the first date, buying an existing business or merging your business with another requires a significant amount of due diligence to ensure that you know what you’re getting into and that you’re getting what you pay for.
The next topic for the ELR Academy will discuss buying an existing business. We will review the process of putting together a non-binding letter of intent, working with mentors who can help you with the process, the difference between signing and closing the deal, and performing the due diligence necessary to make sure you are not buying a lemon.
Check back over the coming weeks to learn more about these issues, and be sure to mark your calendar for Wednesday, April 16, 2014, 5:30 to 7:00 pm at our offices to come learn more about how to buy an existing business.
Buying a business generally happens in four stages. The first is the negotiation of the Letter of Intent. Once the Letter is in place, one party (usually the buyer) puts together the purchase contract.
Second is drafting the purchase-and-sale contract, which is the governing document for the deal. This is a very important process, because it (should) ensure that the deal does what the parties anticipated with they negotiated it.
Third, the buyer generally goes through a period of due diligence. Here, the seller gives the buyer access to employees, books, inventory, and anything else that might be listed in the purchase contract, in order to make sure that the business is what the seller has represented. A properly-drafted purchase contract will list the benchmarks that the business must pass, or the buyer will have the right to back out of the deal. It is much like the home inspection performed in a residential purchase.
Finally, if the business checks out the and buyer’s financing is approved, the parties go to closing. They exchange money, keys, employment contracts, bills of sale, leases, and anything else that was promised in the purchase contract. The buyer is now the new owner and takes over the show.
If you are thinking about buying a business (or preparing your business for a sale), call us today so we can help you think about your priorities in the deal.
Jane had a plan to purchase a restaurant and found Mary—a struggling owner who wanted to get out of the business. The two entrepreneurs negotiated a deal—literally on the back of one of the restaurant’s napkins.
As part of the deal, Jane asked Mary’s landlord if she could assume Mary’s lease; Jane thought she was saving money by not negotiating a brand new one.
The problem was that the lease gave the landlord the ability to terminate the lease at any time if certain conditions were met. So just as Jane’s restaurant was getting up and running, she had to move locations when the landlord decided to exercise its option to terminate.
Jane was able to find a new location to move to, but when she got the lease back, it was nearly 60 pages long. We were able to sit down with her and talk about what the primary goals were for her business and the lease, and then spend a limited amount of time reviewing the lease for only those issues. She understood that she was not getting the gold-plated review of the lease. But she made an informed business decision about what was most important for her at the time.
If you have a large deal coming up, call us today to see if we can help you think about which terms are the most important to you so you can narrow the scope of the legal review and stay within budget.
Michael was a newly licensed accountant. During his last year of school he met Ted, an accountant in Wheaton, who hired Michael as a part-time intern. After Michael graduated Ted kept him on as a full-time employee.
Two years later, Ted began thinking about retirement. By that time, Michael knew most of Ted’s customers, and he was a natural fit to become Ted’s successor.
Michael came to us and we spent an hour discussing what his goals were and what kinds of things he should be thinking about as he and Ted began their transition planning. Michael also got a SCORE mentor who helped him put together a business plan and refine his goals.
With the plan that we and SCORE helped Michael write, he began serious negotiations with Ted. Two weeks later, he gave us a list of 10 bullet points outlining their deal. Because Michael had thoroughly prepared, we were able to quickly convert the list into a letter of intent that he and Ted signed, and from there into a simple purchase contract.
Michael then, with some guidance from us, completed the due diligence items outlined in the purchase contract. Once his “homework” was done, we scheduled the closing.
By working closely with his attorneys and mentor, keeping his objectives in mind, and sticking to his plan, Michael was able to significantly keep down the start-up costs for his new accounting practice.
If you’re getting ready to purchase a business, don’t be a penny wise but a pound foolish. Call us today to schedule an opportunity to meet with you and to discuss your plans.