The concept of buying a business may seem like a daunting task. While the process can involve a lot of important and perhaps complicated parts, it is generally a very systematic and predictable process. Here at Counxel Legal Firm, we strive to simplify the process, and this article will discuss the typical parts of the process. There are essentially 5 steps to buying a business: engage with a letter of intent, negotiate and execute a purchase agreement, due diligence, pre-closing items, and post-closing obligations.

Engage With a Letter of Intent

As it sounds, a Letter of Intent, or “LOI,” is a non-binding letter or document that outlines to the prospective seller your intentions in purchasing their business. It typically outlines the major terms of the deal: the type of transaction, purchase price, how the purchase price is to be paid, the timing of the transaction, and other key considerations such as whether you want key employees to remain after the sale or whether there are debts or liabilities you are willing to assume or take over. Other important terms to be aware of are exclusivity terms, contingencies, and confidentiality/non-circumvention terms. 

The LOI, and the discussions revolving around the LOI, will also set the table for how the negotiations are going to go and will show the seller how much you are willing to fight or how much the seller can push you. 

Negotiate the Purchase Agreement

Ideally, the parties negotiate the purchase agreement as early in the process as possible. Not only will the purchase agreement incorporate the terms from the LOI, but it will also include terms such as representations and warranties of the parties, indemnification terms and procedures, asset and purchase price allocation, hold back provisions, and all necessary disclosures. 

It is important to be aware of the sophistication level of the parties when negotiating and preparing the representation and warranty terms as well as the indemnification terms. It is also as this stage in which other professionals, such as accountants/CPAs, to understand all tax implications associated with the transaction.

Due Diligence

The period provided for due diligence is one, like the purchase agreement negotiations, should be tackled as soon as possible in the process. This is an opportunity as the purchaser to request and review the company financials, assets, current liabilities (which can include both legal liabilities/lawsuits but also debts against the company), potential future liabilities, status of key employees, status of property assignments, status of contracts the company is a party to, how and if those contracts can be assigned, and other items that a prospective business owner would want to review and consider. 

If other professionals have not been retained prior, due diligence is when these professionals are going to come into play as they aid in the review of the company. Honesty from both sides typically equates to success in the transaction. 

Pre-Closing Items

While most people would assume that the due diligence period is the most time-consuming and labor-intensive stage, pre-closing items may be just as time-consuming, if not more so. Typical pre-closing items include:

  • Ensuring financial contingencies have been met
  • Notification of current employees
  • Preparation of the firing/re-hiring of employees
  • Notifications or consent drafted and sent for contracts to be assigned
  • Assignments negotiated and drafted for both tangible and intangible property

One thing that is important to remember is that third parties (the parties that are party to the company contracts, for example) do not have the same incentive as the buyer and seller. It could take weeks, if not longer, to obtain consent to the transfer of a contract from third party.

Post-Closing Obligations

More times than not, the transaction is not over at closing. The extent of post-closing obligations, however, will vary greatly depending on the structure of the transaction. It is normal to expect having to transfer or create new entities for the operation of the business or holding assets, notify government/taxing authorities of the purchase, handle trailing accounts receivable, tax filings, change or revamp organizational structures, or ensure continued payment obligations.

If issues arise post-close, it is often most successful for the buyer and seller to communicate directly prior to getting lawyers involved.  

Contact Us

Each of the previous steps in buying a business could be the topic of an article in and of itself! If you are thinking of buying or selling a business, the attorneys at Counxel Legal Firm are available to walk you through this process in more detail and specific to your circumstance. Our commitment to you is to simplify the process: Legal Counsel Simplified. Call us at 480-536-6122 or email Contact us today!

This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact or 480-536-6122 to request specific information for your situation.

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