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Buying a Business

Buying a business takes thoughtful preparation. Before considering a purchase, it is important to understand your own goals, financial capacity and business experience. Whether you are a buyer looking to purchase his first business or a private or public company seeking to add to an existing portfolio of businesses, it is important to establish goals and parameters that are quantifiable and achievable. Here are some recommendations:

  • Look for a business you know and can understand - do research on the industry, the geographic and demographic reach of the business services and products sold.
  • Know your financial capacity to acquire the business and operate it for at least two years - often, we find that new acquisitions take more time and financial resources than expected and if the buyer does not have access to the cash and financial resources required to operate the business through transition to new ownership, the newly acquired company will be a burden and may fail.
  • Due diligence is more than looking at the books and records and tax returns of the seller - it is worth using counsel and a good accountant/CPA to help you through due diligence. Buyers need to consider not just whether the business is doing well under current ownership, but how will it transition and perform under new leadership. Are customers and vendors contracts assignable or will new contracts be required; will vendor pricing survive and do customers have alternative suppliers? Are there key employees who may or may not stay with the business? Are there non-competition agreements in place with key employees or is there risk they can leave and take customers with them? What liabilities are anticipated and what types of liabilities may be hidden? Consider: Tax Liabilities; Employee Liabilities; Customer Claims and Returns; Prepaid Services or Goods; Product Liabilities and other Liabilities associated with the type of business being acquired.
  • We recommend working with the seller to understand why the seller wants to sell and talking to vendors and customers. Sometimes a seller will not permit contact with vendors, customers and employees during due diligence in order to keep the sale confidential. If that is the situation, without disclosing a potential purchase, you can research the industry and company for reputation and quality of relationships. Check messages boards, social media, attend trade shows, visit competitors, customers and suppliers explaining you are researching the industry. Understand the company's reputation.
  • Understand real value - Know if you are overpaying, paying a fair value or underpaying and why.
  • Whether buying assets, stock or membership interests, it is important to understand which assets you are acquiring and which liabilities will be left behind.
  • Will there be intellectual property, trademarks, patents and other intangibles? How are these currently held and how will they be transferred? Often, intellectual property is held in a separate entity or by the author or inventor. Making sure you are acquiring all of the intellectual property, including designs, sources codes and edit rights and that you have the exclusive and sole right to the property is key.
  • Will there be real estate in the transaction? Consider obtaining a phase one environmental study to ensure you will not be assuming pre-existing environmental liabilities. Also consider liens that arise automatically by law such as mechanics liens and ensure that they will be paid at closing or before.
  • Know how you will finance the transaction. Can the acquisition be financed with an SBA loan or a traditional bank loan? Will the seller agree to take payment over time? Will the seller be paid for consulting or receive part of the purchase price through an earn-out? The Small Business Administration will likely require a seller note to be subordinated to the SBA promissory note. Working with counsel who understands how to structure the note and loan will be imperative.
  • Allocation of the purchase price has tax implications for the buyer for years to come. Sellers try to minimize tax impact on sale, often leaving a buyer with a purchase price allocation heavily weighted toward goodwill. This, however, is not good for the buyer because the cost of goodwill is amortized or divided up and taken as a deduction for 15 years. It is more advantageous to have more of the purchase price allocated to equipment and inventory. The IRS requires a buyer and seller to agree on purchase price allocation and has been clear that the allocation should reflect actual value. Working closely with your accountant and attorney will ensure that the valuation is handled properly.

We recommend that the purchase agreement be reviewed by counsel prior to execution of an offer from the buyer. Once the agreement is signed by the buyer, it is an obligation of the buyer, even if the buyer can walk away during due diligence. Often the due diligence period is short, waiting until you have completed it to engage counsel essentially means counsel will be late to the deal and will have few tools to assist in structuring the deal to the buyer's favor.

At the AEGIS Law, we work with clients on a fixed and phased fee structure to keep costs down from the start. That means that we can work with you from initial concept through closing and beyond at a fee that is commensurate with deal size and status. If you deal terminates, our billings cease as well.

At the AEGIS Law, we pride ourselves on offering practical and solid legal advice to sellers and buyers. Contact us to discuss our strategy-based services.

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