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Things you should understand before buying a business

On Behalf of | Aug 23, 2023 | Business Law |

The decision to purchase an existing business rather than building up your own from scratch is a difficult one. It involves a considerable investment, and there are many things that could go wrong. Here are a few things for you to consider before you finalize the purchase process, so that you can make an informed decision and safeguard your investment.

Understand what you are buying

It may seem self-evident, but the first thing you should do is make sure that you understand the ins and outs of what the business does. Familiarize yourself with the services it offers or the products it makes so that you can conduct accurate market research. Make copious due diligence inquires.

Understand whether the asking price is proper

Many factors go into accurately valuing a business. Make sure that you understand exactly how much cash flow the business generates, how much the business owes in debts and mortgages, and what are its estimated profits. Ask to see financial reports and study them carefully. Hire professionals to evaluate them for you, if necessary. This will help you to determine whether the asking price is fair or not.

Understand how to protect the business after purchase

Once you’ve decided to finalize the decision to purchase after proper due diligence, you must then decide which steps to take in order to protect your new business. For example, it’s usually a good idea to include a carefully crafted non-compete and non-solicitation provisions in the purchase and sale agreement. This will prevent sellers from crippling your new business with unfair competition after the sale.

The purchase and sale agreement should contain provisions for things like; (i) exactly what assets are included; (ii) which party has the right to profits from sales or product in the pipeline; (iii) what seller representations are to be made; (iv) what seller warranties are provided and for how long; and (v) seller’s indemnification for liabilities that arise from transactions prior to closing.

If you decide to keep on the business’s existing employees, you can have them sign non-compete agreements as well, as a condition of their continued employment. This will prevent them from defecting to your competitors and using intimate knowledge of your business against you for a reasonable amount of time.

Also make sure that you implement and enforce thorough Human Resources policies. This will help to minimize the chances of a destructive lawsuit for things such as sexual harassment or employee discrimination.

Purchasing a business isn’t for everyone. It takes careful planning and a significant amount of research. Many times issues arise after the purchase that could have been avoided with a properly drafted purchase and sale agreement. But by taking careful, measured steps and working with a team that includes attorneys and accountants, you can minimize your risk and increase the opportunity to obtain a great return on your investment.