Are you looking to buy a business? If so, you will need to rely on your business acumen and your common sense. You should also invest in legal and accounting advisors. The buyer and the seller are both looking out for their own best interests, and you need experts on your side to support you along the way.
As a potential buyer, considering the seller’s motivations will help determine what should be done for due diligence. Is the seller retiring or is he or she likely to compete? Does the seller foresee changes in the market? Are there new regulations proposed that may affect the business? These all determine whether or not to buy. They may also determine the price. They should also help structure the sale.
Once a decision is made to buy the business, several legal forms will be necessary to complete the sale. Here’s a brief list:
To receive basic information about seller, generally a buyer signs a document agreeing to use the information revealed only for the purpose of considering buying the business. Particularly, if the potential buyer is a competitor of the seller, this agreement may also preclude the buyer from hiring the seller's employees for a period of time, if the sale does not occur.
Letter of intent (LOI)
Defined as a non-binding offer for the business, sellers prefer a more detailed LOI, as their greatest leverage is before its execution. The signed LOI generally contains a provision giving the potential buyer exclusivity on negotiations for period of 60 to 90 days. What issues a LOI depends on negotiations. Buyers often wish to delay risk allocation and seller's indemnification obligations until a definitive agreement is made. It's smart to flush out the important issues so that negotiations can be terminated before extensive legal costs and time are expended on problems that cannot be resolved. Once a letter of intent is executed, key personnel are often told about the potential sale as well as the identity of the buyer who is involved in the due diligence. If a potential sale is disclosed but the sale subsequently falls through, it can cause morale problems for the seller's employees. Also, the seller's reputation may be damaged if the sale falls through. Therefore, it is in the seller's best interest to resolve as many details as possible in the letter of intent. Just as the buyer wants to know if there are roadblocks to the sale, the seller will also want to know about any potential problems as soon as possible to reduce legal fees and time commitment to a failed transaction.
After the confidentiality is in place, the buyer conducts preliminary due diligence—an analysis of seller's business and financial results. The analysis at this stage establishes the potential price and determines whether the buyer remains interested. After the letter of intent is executed, the buyer completes due diligence, which may include talking to key customers, suppliers and personnel. Due diligence is designed to give the buyer a full understanding of the risks and liabilities of the business. Many times, the buyer revises the bid based on information generated during the due diligence process.
As a buyer, you need to ask yourself what key assets you want to acquire. Some examples include patents or licenses, key customer contracts or supply agreements, equipment or personnel. If the documents are drafted to accomplish the purchase of the key elements of the business and to allocate the risks for past and future events in a manner you, as the buyer, understand and accept, the purchase is being done correctly.
Matt Kinley is the founder of Kinley Law Practice.