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How Do I Buy a Business?

Posted by Jonathan Krems | Nov 03, 2021 | 0 Comments

Well, it's the end of the year, and the concept of planning for the next year is a popular one.  In today's Freedom Friday blog and email newsletter, I want to discuss the first of several topics to prepare for a new year.  The first topic I want to talk about is buying a business in the new year.  In today's Freedom Friday blog and newsletter, I want to answer the question, “How do I buy a business.”

If you're thinking of buying a business in the new year, the first thing you need to do is consult a lawyer about the prospective transaction.  You should not be making this decision alone.  If you're thinking of buying a franchise, there are some additional steps that need to be taken.  However, if you're interested in buying a business, here are ten (10) steps you should take in buying a business in the new year:

1.  Form a Business Purchasing Entity

The first step to buy a business, and one that is often overlooked, is you need to form a business purchasing entity.  You never want to buy the assets of a business in your own name.  Maybe you already have an LLC set up for this purpose, but you need to have a separate business entity solely for the purpose of purchasing the business assets you are interested in purchasing.  As a prospective buyer, you certainly do not want to sign a letter of intent, or a purchasing agreement in your own name.  Also, if you have an LLC which is a holding company for residential real estate, you probably should form a separate LLC to purchase commercial property, so that your residential real estate assets are not exposed to the liabilities of your new commercial enterprise.

2.  Do a Preliminary Investigation

The second step to buy a business is to do a preliminary investigation.  Once you sign a letter of intent (see below), you will need to conduct due diligence, but before you do that, there may be some items you should investigate before you make an offer.  For instance, if you plan to buy commercial equipment as part of the business assets, what condition is that equipment in?  If you plan to purchase commercial property, what condition is the property?  Will there be needed repairs in order to operate the business successfully?  Also, this is the step in which you need to look at the location of the business you're interested in buying.  Is it a good location or would you need to move the business for it to be successful?  Also at this stage, you need to find out what is actually for sale?  Is the current business owner wanting to sell the assets of the business, or something else?  Lastly, you should find out if your purchase can be financed or not.  Many business purchases are financed, and this is a good time to have a talk with your lender if you haven't done so already.

3.  Decide the Deal Structure

The third step in buying a business is deciding the deal structure.  A business purchase is a structured deal, either a merger, stock purchase, or most commonly an asset purchase.  Sometimes it is also a combination of the above.  If the business was formed as a corporation, you may be buying the stock of the current owners.  However, most business purchases are structured as asset sales, including the land, building, furniture, fixtures, equipment, inventory, business name, and any other assets.  You might also assume liabilities, including a commercial lease, debts, payroll taxes, etc.

4.  Determine the Price

The fourth step to buy a business is determine the price.  In determining the price, its always best to consult with an accountant or appraiser who can assess the business on your behalf and help you make an offer.  Once you determine the value of the business you're interested in buying, then you will be able to make an offer, whether at a discount, market price, or a surplus.  You will be able to figure out what consider you can offer the seller, including cash, debt, equity, assets, etc.

5.  Sign the Letter of Intent

The fifth step in buying a business is to sign the letter of intent.  After you decide how to structure the deal and determine the price, the parties need to enter into a letter of intent.  The letter of intent is an agreement signed by both parties that will give the basic details of the transaction, including the purchase price, a description of the deal structure, requirements for due diligence (see below), and it should also include language to prohibit the buyer from discussing the deal with third parties, along with language to prohibit the seller from talking to or negotiating with other potential buyers.  The letter of intent should be drafted by an attorney who is assisting you, the buyer, in the process of buying the business.

6.  Due Diligence

The sixth step in buying a business is due diligence.  Again, as a prospective buyer, you need to hire a lawyer, an accountant, or both, to assist you in conducting due diligence.  There are tons of documents which will need to be requested.  Some of them include current ownership and structure documentation, along with proof of the same; current list of customers and accounts receivable; current list of vendors and accounts payable; financial statements; tax returns; contracts between the company and third parties; contracts between the company and its current owners; employment records; maintenance records; a list of assets along with proof of ownership; a list of all liabilities; minutes of meetings of owners and officers of the company; and identification of any litigation, liens, or judgments of the business which you're interested in purchasing.

7.  Negotiate the Purchase Agreement

The seventh step in buying a business is negotiating the purchase agreement.  Usually the buyer will have his or her attorney draft the purchase agreement and present it to the seller or the seller's attorney.  The purchase agreement should include the purchase price, payment, financing, a list of all assets and liabilities, tax considerations, escrow issues, indemnification provisions, and many other terms which must be included in the purchase agreement.

8.  Prepare the Closing Checklist

The eighth step in buying a business is to prepare the closing checklist.  This is a list of every single document, instrument, or action which must be completed, signed, and/or delivered at closing.  This list should be updated regularly, and it should be shared with the seller or his or her attorney throughout the process so that expectations can be managed.  The closing checklist should also include a list of approvals and consents which are required to properly close the deal.  For example, it should include required consents from the landlord if the business includes leased property, or suppliers, shareholders, boards of directors, creditors, or any other third parties, if necessary.

9.  Obtain Approval and Consents

The ninth step in buying a business is obtaining approval and consents.  Before closing the deal, all the approvals and consents listed in the closing checklist must be obtained.  If the business involves leased property, the landlord will likely require a consent to the transaction.  Any approvals or consents from suppliers, shareholders, the board of directors, creditors, or other third parties must be obtained prior to closing.

10.  Close the Deal

The tenth and final step in buying a business is closing the deal.  At closing, the parties will sign a bill of sale and the purchase agreement in its final form.  The purchase price will be paid if it has not been paid already.

If you are interested in starting a small business anywhere in Oklahoma, or you are interested in restructuring your small business, please contact me at [email protected] to schedule a FREE consultation.

For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com/

About the Author

Jonathan Krems

Jonathan is the Founder and Managing Attorney of Liberty Legal Solutions, LLC, a law firm dedicated to building, protecting, and defending the business and personal interests of our clients in Oklahoma.  Jonathan's primary practice areas are business law, contracts and agreements, business liti...

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