Pitfalls of Purchasing a Business
By: Kyle Jensen, Esq.
Clark, Campbell, Lancaster & Munson, P.A.
Acquiring an established and successful business may appear to be an attractive and low risk proposition for both experienced or novice entrepreneurs; however, there are numerous issues a prospective buyer should consider and pitfalls to avoid before purchasing a business. Asking the right questions and conducting proper due diligence can save the buyer significant time and money and put the buyer in a strong position to succeed once it purchases the business.
Generally, there are two basic ways businesses are sold. The first is the sale of the ownership interests of the business. The second is the sale of the assets of the business. Each avenue provides various benefits and detriments, and a prudent buyer will consider all factors before determining how it will acquire the business. For example, purchasing the ownership interests of the seller allows for a smooth transition of the business, but may also expose the buyer to significant liabilities. Further, purchasing the assets of the seller may, but not always, allow the buyer to avoid certain liabilities of the seller, but may also require the buyer to renegotiate advantageous contracts with the seller’s vendors and customers.
Regardless of whether the buyer is purchasing the seller’s ownership interests or the seller’s assets, the buyer should determine the potential liabilities the buyer may be exposed to after the purchase, such as whether there are any (i) outstanding lawsuits against the seller, (ii) outstanding taxes due, or (iii) security interests filed against the seller’s assets. It is vital that the buyer ascertain its exposure to potential liabilities and either adjust the purchase price of the business accordingly or walk away from the deal.
Other issues the buyer should consider relate to the operation of the business once purchased. For example, the buyer may want to obligate certain owners or employees of the seller to assist the buyer with the transition and operation of the business after closing. The buyer may also want to impose a non- compete on the seller and its owners, prohibiting them from competing with the buyer in its business. Lastly, if the seller is renting the premises where it operates, then the buyer should carefully review the lease to confirm the terms are agreeable to the buyer and that the seller can assign and the buyer can assume such lease. It is always prudent for the buyer to require the seller to obtain the landlord’s consent to such assignment.
The above items are just a few of the numerous issues a buyer must consider when purchasing a business. Accordingly, it is often in the best interest of a buyer to retain an experienced business attorney to assist them with purchasing a business.
Kyle Jensen is an attorney with the law firm Clark, Campbell, Lancaster & Munson, P.A. in Lakeland. Questions can be submitted to email@example.com.