While buying a business can be an exciting time, it is important not to let your emotions get the best of you. Knowing when not to move forward with a deal is extremely important, even if you are already sitting at the closing table. The following are some examples of issues that can be so severe as to cause one to pull out of a deal, or at the very least, take a step back to re-evaluate the entire situation.
If you are looking to buy a business, the seller should have records easily available for you to review. These records should include financial statements, employment agreements (including any non-compete or non-solicitation agreements in place), material agreements with customers, vendors, suppliers, intellectual property-related agreements (e.g., confidentiality agreements, invention assignment agreements, trade secret protection agreements), agreements with investors, partners, or other principals, and much more. Even if the “bottom line” on the documents looks good, it is important to be able to see everything that has been going on with a company to lead up to that point. Poor record-keeping can be a warning sign that something is not quite right or is not being advertised. Some of the critical issues that can arise as a result of poor record keeping include, but are not limited to:
- Disputes or ambiguity over who owns the assets or applicable intellectual property
- Whether agreements are transferable in the sale (if desired), or
- Whether you have protection against employees taking what they know about the business and competing
Processes and Procedures and Issues with the Management Team
Many entrepreneurs fail to document the processes and procedures that are used within the business. Instead, they rely on the institutional knowledge of employees who have worked there to keep the business running and to train new employees. However, a business with no documented processes and procedures can be difficult, if not impossible, to seamlessly transition to a new owner. Depending on the terms of the purchase, a buyer could be left with a business that is running solely on the institutional knowledge of employees. However, since a company can’t really compel an employee to continue to work for the business, the buyer is at great risk of those employees leaving the company. Then, the buyer will be forced to potentially “recreate the wheel”.
Likewise, in many cases, a business is successful primarily because of the leadership in place. This is especially true when the business was started and run by the original owner. Prior to buying any business, it is critical to have an excellent understanding of who on the leadership team will remain in place and how those who may be leaving will be replaced. Any last minute changes to the management team could potentially cause a buyer to step back from the deal until the situation can be properly evaluated.
Financial & Lien Issues
If a business has issues with back taxes, the IRS may very well have a lien on the business assets. This lien will remain in place even after the owner of the business makes the sale. In many cases, the issue can be several years old, and may not be easily uncovered when looking into the business. It is even possible that the owner of the company isn’t aware that there is still a tax obligation in place. If you discover any type of issues related to the IRS, do not move forward with the closing until it has been properly resolved. Further, there are many other types of liens that can be placed against a business, or even specific pieces of business property. Ensure everything is addressed and evaluated before closing.
A well negotiated business purchase will give a Seller a chance to disclose all of the “warts” of the business. However, we have been involved with at least one transaction where the Seller orally made statements (at the closing table) that were contrary to the “representations and warranties” provided in the Agreement about the business. This should be viewed as a significant red flag that warrants delaying the closing and/or (if problematic enough) terminating the transaction. But, in essence, the Seller should be going through the trouble of providing ample disclosure, in writing and as part of the purchase agreement. Statements that wildly conflict with those written representations and warranties at worst indicate potential fraud and, at best, demonstrate a Seller’s lack of attention to the deal. In any case, it should be viewed as a concern to the Buyer that warrants extra scrutiny and possibly walking away.
Don’t Buy On Your Own
Buying a business can be a great investment; but, it can be a financial disaster if it’s not done correctly. There are many potential landmines that can turn the dream of business ownership into a nightmare. Having an experienced attorney at your side to ensure everything goes smoothly is a great way to protect your investment. Contact Doida Law Group to get the help you need to successfully purchase a company.