Tips For Buyers of a Business to Avoid Costly Mistakes
Business acquisitions are complex transactions that can provide you with an opportunity to realize a good return on your investment or become a financial nightmare. To maximize the likelihood that you will close upon a deal that is right for you, you need to have an experienced business lawyer as part of your team. Because pre-printed forms and amateur advice are plentiful on the Internet, people may be tempted to believe that they can do it themselves. My first and most important advice to you is — don’t!. The purchase of a business is not a “DIY” project and the consequences of trying to do so can be disastrous.
Don’t be “penny-wise and pound-foolish”. If you are going to buy a business, engage an experienced business lawyer. For the purchase of a business to be a successful financial venture, you must have a contract that is tailor-made for you, your needs and interests, and terms and conditions that are favorable, or at the least acceptable, to you. That is why, if you have the opportunity, it is preferable for your lawyer to draft the contract. Yes, it involves more expense, but it also gives you an advantage because then the negotiations begin from your vantage point. The opportunity to gain more favorable transaction terms likely will outweigh the expense of having your lawyer draft the contract.
When assessing a business purchase opportunity, you should expect an experienced business lawyer to assure that certain fundamental issues are addressed. Here are just three examples of the important areas in which an experienced business lawyer can guide you.
1) Due Diligence
You need to make sure you know what you are buying before you sign a definitive purchase and sale agreement, or you may be blind-sided and find that there are serious problems about which you were unaware. So, you must have an adequate period of time in which to conduct your investigation and the seller must be contractually obligated to provide you with all documents relevant to your investigation and analysis. This period of time is know as a “due diligence period” or “feasibility period” and gives you the opportunity to evaluate the seller, its business and decide whether the deal is right for you. Your lawyer needs to negotiate an adequate amount of time for you to conduct your investigation and your right to terminate the deal if you investigation reveals information with which you are uncomfortable.
2) The Escape Hatch
Your lawyer should advise you of the conditions under which you should not close the deal and make sure you have the right to terminate the purchase under those circumstances. What if the business suffers a catastrophic event between the time you sign the purchase agreement and the time of closing? You should not be obligated to consummate the purchase and deal with the catastrophe. What if you are not approved for the loan you need to consummate the purchase and thus, you don’t have the money necessary to fund the purchase? You need to provide for these contingencies. Otherwise, you may find yourself in an expensive and lengthy lawsuit and may be liable to the seller for significant damages for failure to close the deal.
3) Representations and Warranties
You need to require the seller to give you written assurances about the aspects of the business that are important to your decision to buy the business. Often, negotiations over representations and warranties reveal information about the business you may not have discovered during the due diligence period. An experienced business lawyer will explain to you what representations and warranties are necessary for your transaction. If you learn significant negative information in the course of negotiating the representation and warranties, then you will be in a better position to decide whether you want to proceed with the transaction at all or need to negotiate more favorable financial terms.
These are only three examples of important provisions that you need to make sure are part of your purchase agreement so that your promising investment does not turn into a financial disaster. Don’t go it alone. Make sure you have the advice and guidance of an experienced business lawyer.
