Whether you’re buying or selling a business, one thing remains the same: there are a lot of moving pieces that need to fall into place to ensure everything runs smoothly. Both can be stressful ventures, but they can also be exciting!
Whether you’re buying or selling a business, you’ll likely be working with a team of professionals, including accountants, valuators, lenders or bankers, and of course, your legal advisors. They’ll work together to guide you through the process.
In this blog, we highlight some important aspects that one should consider throughout the process of Buying a Business. For general information regarding Selling a Business, read further here.
Buying a Business
When the opportunity arises to buy a business or when you’re seeking out a business to buy, you’re going to be turning a critical eye to just about everything. Is the business in the right location? Is it cash positive (making money)? Has the business been successfully trending upwards in recent years?
When you look at a business, for example, one that you’ve used in the past, you’re only seeing what’s on the surface. There are probing questions that can tell you what’s going on behind the scenes. Is there a unique product or service, or are you looking at a world of endless competition? Are there industry trends suggesting future growth? Is the existing workplace culture positive? Are the staff happy, and does the business have good retention?
Once you’ve investigated some of these questions, you’ll need to get a sense of the business’ value. Even if the owners are happy to provide financial documentation, an outside professional valuator can offer an educated opinion on what the business is worth. The sellers may have a price in mind, but there may be room for negotiation.
The next step is to submit a Letter of Intent, which is not a binding contract but formally states your intention to purchase the business. This will include your target purchase price and can mention how you intend to complete the business purchase – either as an asset purchase or a share purchase. The distinction is important – a share purchase essentially lets you buy the business ‘as is,’ but in an asset purchase, you can pick and choose what you would like to purchase.
Upon the buyer and seller executing a Letter of Intent, your legal team will work closely with you to draft a Share Purchase or Asset Agreement. This stage is vitally important for numerous reasons. One reason is that it dictates which documents you will be entitled to view during your due diligence period. Without a properly drafted Agreement, you may discover things about the business during the due diligence phase that make you want to back out of the deal but cannot due to the terms of the Agreement.
The Agreement will also determine the price you pay for the purchase of the business. While this may seem as straightforward as “this was the price we agreed to,” many Agreements for the purchase of a business will contain numerous adjustments that may drastically alter the price. It is important to have your Agreement carefully drafted and thoroughly reviewed for this reason.
While it would take too long in this blog to discuss all the crucial aspects contained in the Agreement, it is important to highlight that your Agreement will dictate your chances of recovery if the business is not what you presumed it would be. If you purchase a business, and it is drastically different than you envisioned, whether you are entitled to be compensated will depend on the terms negotiated. Does the Agreement provide that you can only recover your losses if you were intentionally misled? Does it provide for recovery if the seller should have known about false information provided? Or does it allow for recovery if the seller was wrong, regardless of how much they knew? Your legal team will aid you at the early stages to minimize these future risks.
The next stages are where the rubber meets the road – due diligence and financing. Due diligence involves a thorough investigation into the business’s finances over the past several years, looking at debt, expenses, revenue, taxes, and even legal records. While your accountant will help in the due diligence of the business’s finances, your legal team will provide invaluable assistance on corporate matters. They will take the time to review the business’ minute book to ensure that you are not inheriting any ongoing shareholder disputes. Depending on the Agreement, your legal team may also be allowed to review the business’s contracts with employees and clients to highlight any serious concerns and/or liabilities. Financing will happen on your end to ensure that you can secure financing for your purchase, similar to securing financing before purchasing a home.
Once everything is in order, your legal team will assist with the transaction and how the changeover will take place. The process can be lengthy; while some purchases happen over weeks, others may take months or even longer, so a strong sense of commitment is key to staying motivated through the long haul. Throughout the process, your legal team will facilitate the transfer of funds, ensure the necessary documents are provided at the correct times, and ensure that the seller abides by their obligations.
Building the Right Team
The above just begins to scratch the surface of the potential complexities involved in the purchase of a business. Buying a business or its assets has the potential to lead to unintended and costly outcomes. The right team of lawyers and accountants can provide invaluable assistance in avoiding these outcomes and offering you the maximum protection should they arise.
If you’re looking to buy a business or sell your business, work with an experienced business lawyer. Our firm has been working with businesses of all sizes throughout the Cambridge, Kitchener, and Waterloo Regions for decades, and we’re well-equipped to handle all sizes and styles of transactions. Contact us today to set up a consultation.