There are many benefits to buying a business that already exists, as opposed to starting a business from scratch. Businesses that are already established typically come with a solid customer base, a fully hired staff, and a physical location and/or online presence. This can make it easier for a buyer to operate an existing business since it is presumably successful.
Some legal steps to buying a business that you may want to consider taking first include:
- Creating a budget to know how much you can afford to spend on buying a business;
- Hiring a business attorney to perform due diligence on the business you plan on purchasing;
- Discussing the purchase with the other buyers (if there are any) and understanding their goals before you enter into negotiations;
- Developing a business plan to see if it is feasible to continue operating the business;
- Requesting to see an existing business’s current financial and legal documents;
- Making a list of items that are non-negotiable for you to purchase the business or that you need to confirm that the business has before you buy it;
- Checking that the business has a good reputation; and
- Researching the industry to ensure that you are not buying a business that will soon be obsolete.
Of course, many of these steps can be performed by a local business attorney. An attorney is also a valuable resource to have because they can provide legal advice that is relevant to the purchase. These include what types of documents you will need to purchase a business and how to check if a business is a wise investment or if it carries too much debt.
Advantages of Buying an Existing Business
As previously mentioned, some of the advantages to purchasing a business that already exists as opposed to starting one from scratch include having:
- An established customer base;
- A full staff;
- A physical and/or online presence;
- A network of professional or business contacts;
- A financial history, which can make it easier to secure funding;
- Inventory, machinery, or equipment; and
- Various other items that must be purchased in order to operate a business and/or supply its customers.
Also, unlike a business started from scratch, purchasing an existing business will enable the buyer to begin generating revenue from day one. A buyer will not have the stress of having to find customers, obtain funding, or any of the other risks that are involved with starting a brand new business.
Again, this is because all of the time, money, and energy that would be required to start a business from scratch will be readily available since the business is already established.
Should I Buy a Franchise as an Existing Business?
In general, a franchise is a type of authorization that is granted to another group or individual by an original business entity. This authorization will enable the group or an individual to use, market, and/or sell commercial items from the original business entity. The original entity in a franchise is known as the franchisor, whereas a group or individual buying the franchise is called a franchisee.
For example, many fast-food chains are set-up as franchises. The parties will enter into a franchise agreement in which the franchisor will give the franchisee certain permissions over the business. This allows them to oversee and establish a new fast-food location that uses the original chain’s advertising materials, logos, company policies, and so forth.
Although the parties to a franchise agreement may tailor the contract to incorporate any provisions that they wish during the negotiations stage, there are two primary ways in which a franchise business is operated. The first way involves a situation where the franchisor implements a strict set of business policies and retains a high degree of control over the day-to-day operations of the franchise business.
This means that while the franchisee is still the one running the business, the franchise agreement binds them to many requirements and policies, so that the new location will resemble the original business.
The second and less common way that franchise businesses are set-up is by giving the franchisee an increased amount of control over the business and more flexibility in how the business looks and/or operates. In such situations, it usually means that the franchisor will remain in control of a product (e.g., selling an Apple MacBook through an electronics store like Best Buy, but note that this is not considered a true example of a franchise).
How Much Should I Pay for a Business?
The amount that one should pay for a business will depend on a countless number of factors, such as:
- How much the business is worth;
- How much the buyer is willing to pay or the seller is willing to negotiate for a lower price;
- How much debt and/or liabilities the business carries;
- How long it will take to pay down those debts or resolve those liabilities;
- How many individuals are buying the business;
- How much each person involved in the purchase process intends to pay for the business (e.g., equal stakes or unequal portions);
- Where the business is located; and/or
- Various other factors that may affect the purchase of a business on an individual basis (e.g., the industry, its customer base, etc.).
Persons who are planning on buying a business should speak to both a business attorney and financial advisor regarding the purchase. Such professionals will be able to review all financial documents related to the business (e.g., tax returns, bank statements, etc.) and can hire outside contractors to have the business appraised.
A business attorney can also help to negotiate for a lower sale price if the individuals buying the business feel that it is being sold for too much.
Tips for Moving Forward in Buying an Existing Business
Some legal tips when buying and selling a business include:
- Hiring a business attorney to perform due diligence, oversee disputes, and/or handle necessary legal issues and procedures associated with the buying and selling of a business;
- Making sure that a business’s debts and liabilities are completely resolved before selling or buying the business;
- Creating a solid business plan to begin running the business as soon as it is sold, or alternatively, developing an exit strategy to follow once the business is sold;
- Cooperating with the opposing party during all negotiations and any other discussions associated with the transaction;
- Asking questions about a business that a buyer will need to answers to in order to operate it successfully, or as a seller, being up front about any problems that the business is currently experiencing; and
- Hiring separate appraisers to find out how much the business is worth before it is sold or purchased.
When Is a Good Time to Sell a Business?
The best time to sell a business is when the business carries minimal risk. This means that it does not have any sort of unmanageable debt, is not in danger of going bankrupt, and/or is not involved in an ongoing or soon-to-be lawsuit.
Another good time to sell a business is when the business is generating a lot of revenue and is forecasted to make a large profit over the next few years. This can also help to convince buyers that it is worth spending a large sum of money in order to purchase the business.
One other factor that may indicate that it is a good time to sell a business is when the economy is strong or if the business is part of an industry that is currently trending. These reasons may also apply if the conditions for a specific market or the economy where a business is located is growing and/or the business’s products or services are in high demand.
What Should I Do When Preparing to Sell My Business?
Some steps that a party should take when preparing to sell a business include:
- Updating the business’s financial records and/or their personal records if the business is structured as a partnership;
- Hiring a real estate agent to help them list and sell their business at a competitive rate;
- Hiring an appraiser to determine the exact value of their business, which can assist in negotiating a fair price;
- Consulting with a business attorney to ensure everything is in order when it comes time to finalize the sale of the business; and/or
- Gathering any documents that are important to the sale, such as the lease or title to the business property, business financial statements, agreements with vendors, and various other paperwork.
As previously mentioned, there are many advantages to hiring a lawyer to buy and sell businesses. Not only will a lawyer be able to assist with all of the issues discussed throughout this article, but they will also be able to help with all of the steps presented in the above list.
What Should Be Included in the Sales Agreement?
Whether a business is being sold or purchased by another party, the parties will need to eventually create a sales agreement. The sales agreement, sometimes referred to as a commercial or business contract, should contain the following terms and provisions:
- The total sale price of the business, along with when payment is due and the manner in which it is being paid;
- A detailed description of the services and/or goods being sold with the business;
- A detailed description of any real property being transferred to the new owners (e.g., the office, furniture, equipment, machinery, etc.);
- Any warranties being guaranteed by the seller or buyer if applicable;
- A provision stating that all changes must be made in writing;
- The date for when the entire company will transfer over the new business owners;
- Terms on how the business will be operated by the purchaser or what the seller intends to do as part of its exit strategy; and/or
- Various other conditions that should be addressed by experienced business attorneys and which pertain to the specific business being sold or purchased.
What Are Some Legal Issues to Consider when Selling a Business?
Some legal issues and/or disputes that can arise when selling a business include the following:
- How the seller of a business intends to eliminate all of a business’s debts and liabilities before the business is sold;
- If there is a physical location for the business, alerting the landlord to the transfer of ownership;
- If there will be issues in maintaining the business’s customer base and/or employees after it is sold;
- Whether the seller wants to hand over the rights to the business’s intellectual property or if there is a way they can hold on to it for themselves and require the buyer to create and register for new IP rights;
- Whether all of the equipment, inventory, and/or machinery being sold along with the business is in good condition or if it will cause an issue with the buyer if it is not;
- Whether the buyer is aware of all business debts and liabilities that could potentially put the seller at risk if the buyer finds out about it after the sale; and
- Various other legal issues that should be discussed with a business attorney.
The best way to go about resolving most of these issues is to be up front and honest with all parties whom the transaction may affect. For example, tell customers, employees, and the landlord that the business is being sold to a new owner. Also, do not forget or try to hide any glaring problems with the business from the buyer before it is sold. Otherwise, this could pose a problem in the future.
Additionally, one other way to resolve most of these issues is to create a detailed sales agreement. The seller should discuss any foreseeable issues or disputes with their attorney, so they can work this out for them during the negotiations stage of the contract.
Should I Consult an Attorney When Buying or Selling a Business?
It is strongly encouraged that you hire and consult with a business attorney before you purchase or sell a business. Undertaking this type of transaction by yourself can be extremely risky. It also is not the most prudent of decisions since it can endanger the livelihood of the business owners as well as the business itself.
In some situations that involve buying or selling a business, a business owner can potentially be held both fiscally and personally liable for any resulting errors. For instance, if a business was sold without complying with the proper procedures first, then the owner of the business can be sued for damages associated with this conduct.
Accordingly, if you intend to purchase or sell a business, then it would be in your best interest to speak to a local business attorney before you take any other steps. An experienced business attorney can assist you in restructuring a business before you sell or purchase one. Your attorney can also perform due diligence to make sure that the business is a good investment or that it is being sold at a fair price, depending on your position in the transaction.
Your attorney can also draft and review any agreements associated with the closing process, including making sure that you comply with the law and any rules that govern the transaction. Additionally, your attorney can negotiate for more favorable terms on your behalf and amend the relevant provisions before you officially sign a contract to finalize the purchase or sale of a business.
Lastly, if any legal issues or disputes should arise that require you to appear in court, your attorney will be able to provide legal representation at the proceedings as well.