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How to Buy a Business

Posted by Jonathan Krems | Sep 10, 2021 | 0 Comments

We are in the middle of the holiday season, and many of us are out and about buying the perfect gifts for each of our loved ones.  However, if you're an entrepreneur, you might be looking to buy that perfect “gift” for yourself, that is, you might be looking to buy a business in the new year.

In today's Freedom Friday blog, I want to share ten (10) steps how to buy a business.  Before I get to the first step, as always it is best to consult a lawyer who can help you with each step of the process.

1.  Form a Purchasing Business Entity

The first step to buy a business, and one that is often overlooked, is you need to form a purchasing business entity, if this has not been done previously.  As a prospective business purchaser, you certainly do not want to sign a letter of intent, or a purchasing agreement in your own name.  You also want to be careful if you already have an LLC, or other entity, available with which to purchase the business.  If you have an LLC which is a holding company for residential properties only, you may wish to form a separate LLC to purchase commercial property with, so that your residential 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 even before you conduct due diligence, there may be some items you should investigate before you make an offer.  For example, if you plan to buy commercial equipment as part of the assets of the deal, what condition is that equipment in?  If you plan to purchase commercial property as part of the business, what condition is the property?  Will there be needed repairs in order to operate the business successfully?  Also, this is a stage where 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 in order for it to be successful?  You should also find out what you're buying at this stage, or more specifically, what is for sale?  Is the current owner interested in selling the assets to you, or something else?  Lastly, this is the stage to figure out if your purchase can be financed or not.  Many business purchases are financed, and this is a good time to discuss your prospective business purchase with a 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, a stock purchase, or most commonly an asset purchase.  Sometimes it is also a combination of the above.  If the business is 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, the building, furniture and fixtures, equipment, inventory, the business name, along with any other assets.  You might also assume some liabilities, such as a commercial lease, payroll taxes, or other liabilities.

4.  Determine a Price

The fourth step in buying a business is to determine the price.  At this stage, it is best to consult with an accountant or an appraiser, who can assess the business on your behalf and help you make your offer.  Once you determine the value of the business you're interested in buying, you will be in a better position to make an offer, whether at a discount, market price, or a surplus.  You will be able to figure out what consideration 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 have decided how to structure the deal and determined the price, the parties need to enter into a letter of intent.  The letter of intent is an agreement signed by both parties to the transaction that will outline the basic details of the transaction, including the purchase price, a description of the deal structure, requirements for due diligence (see below), and the letter of intent 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 or an accountant (or both) to assist you in coordinating due diligence.  There are tons of documents which need to be requested during this stage.  Some documents which need to be requested 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 all 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 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 attorney draft the purchase agreement and present it to the seller (or the seller's attorney) for review and comment.  The purchase agreement should include the purchase price, payment and financing, a list of all assets and liabilities, taxation considerations, escrow issues, indemnification provisions, and many other terms which must be included in the purchase agreement.

8.  Prepare a Closing Checklist

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

9.  Obtain Approvals and Consents

The ninth step in buying a business is obtaining approvals 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 likely will 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 before closing.

10.  Close the Deal

The tenth and last 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 so already.

If you are interested in buying a business and would like a free consultation, please do not hesitate to contact me at [email protected].

If you are interested in starting a small business anywhere in Oklahoma, or if you have a small business and you are looking to grow, please feel free to contact me at [email protected].  For more information about Liberty Legal Solutions, LLC, please visit our website 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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