When most people buy a business they simply think, “I’m going to buy this business.” This leads to buyer’s remorse when the Seller removes assets or lets the business fall apart in anticipation of the sale. In the spirit of the holidays, I offer you The 12 Days of Buying a Business. Essentially, my top tips to anyone buying a business. If you are on the other end of this – if you are selling your business – these tips are for you, too. Sellers: stay true to these tips to avoid disputes and have a happy buyer!
This will be a multi-post series covering all 12 tips in combination with a vlog that covers each of these tips in more depth. The video is linked down below so give it a watch! Today I give to you tips 1, 2, and 3.
Buying a Business Tip 1: Don’t buy the business only buy the assets.
Start your own company and have that company buy the assets from the seller’s company. It is important that you define the following:
- Included assets: inventory, lease, goodwill, commercial lease or real property, intellectual property (logo, brand, etc.), vendor lists, website and social media, equipment, etc.
- Excluded assets: anything that isn’t included in the sale.
- Included liabilities: liabilities from the lease AFTER closing. For example, any other leases you know you are taking on
- Excluded liabilities: tax liabilities from prior to closing; any other obligations. Don’t take on their debt!
Tip 2: Structure your deal to discourage a gutting of the business prior to closing.
Sometimes, a seller will “gut” the business of inventory in the days or weeks leading up to the closing date. Why pay for more inventory, if you don’t have to, right?
Make sure you understand what inventory levels are typical for the business you’re purchasing, or what customer or client accounts are active. Consider establishing set minimums and give those minimums teeth by allowing the price to be reduced based on the wholesale value of the inventory at closing.
Tip 3: Structure your deal so that you have the right to negotiate long-term contracts prior to closing.
The business you are buying will be shaped by its long term contracts. For example, a brick and mortar business is typically planted at a physical location. Your right to operate there depends on the existence of a commercial lease. Make sure that you have the right to fully negotiate the lease to your satisfaction, as a contingency to closing. For example, if you need 5 years of operation at that location for your business to be successful, make sure you have a lease that reflects your right to operate there for at least 5 years.
Stay tuned for my next tips. If you have questions on buying a business or starting your own business, please feel free to give our office a call. We’re great attorneys who care about our clients, and we’re looking forward to helping you have a good and safe transaction. Also, these tips are for general guidance. A strong, safe business transaction should include the review of any documentation by an attorney. Give us a call today to schedule a review.
Halverson Law specializes in Business Law and provides expertise and representation on both transaction and trial work. Negotiating strong contracts and crafting practical legal strategies — it’s what we do. We’re ready to help wherever you are in the process of buying or starting a business.