Many people dream of becoming an entrepreneur by starting their own business. Others see the alternative of buying an existing company to be a better approach. Given a track record to review, purchasing an existing company is typically a safer and faster route to profitability versus starting a venture from scratch.
Don’t make an offer before answering these questions
Due diligence must be undertaken well before final negotiations and closing takes place. It’s advisable to work with an experienced business law attorney and an accountant to identify strengths and weaknesses, to calculate a proper purchase price, then to draft a letter of intent or purchase and sale agreement, as the case presents.
Above all else, make sure the target company is a good fit by asking yourself these questions:
- Do I have the necessary experience in the industry?
- What strategic advantages can I bring to the table?
- How will I personally benefit? What is the risk/reward calculus?
- Why are the current owners selling? What latent liabilities may exist?
- Do I need to hire more people, find a new location or file specific permits?
- Do I have the passion and energy necessary to make this business successful?
Inspect tax documents
During due diligence, ask the current owner for recent tax returns. They are more likely to contain valid information that can be compared against internally prepared financial statement. Be wary of sellers who say they underreport income, as there’s no telling what else they may misrepresent. You need to make sure you’re buying the company free from any potential liabilities.
Retain key people
Unless you are already an expert in the industry, you may want to offer financial incentives to keep essential employees at least through the transition period. This is crucial to retain your customer base. If it’s beneficial to keep the seller/former owner around, structure a deal based on incentives to get them to remain for a defined period with interests aligned with the new owner.
Sign noncompete, non-solicitation and non-recruitment agreements
As part of the sale agreement, have the seller agree not to compete against you in the market. These provisions typically run from one to five years and define geographic restrictions. Sign a “non- solicitation” agreement, so they don’t poach customers, and add a “non-recruitment” accord, so they do not take valued employees with them.
Ignore pressure tactics
Sellers and brokers often try to force you to close the deal quickly by saying “other parties” are interested. These “potential” buyers are likely not serious. Most business sales take months to complete.
Execute the deal after a thorough investigation
Before moving forward, you must be sure of what you are buying, whether the price is fair and how to protect your investment. Once you’re satisfied that you’ve covered all the bases, it’s time to close the deal. Your attorney and accountant can also help you determine whether you need extra capital to start on solid footing and review loan documents if you are financing part of the transaction.