Legal Topics

Legal Issues In Acquiring A Business

buying a business

Entrepreneurs looking to go into business may find that purchasing an existing venture is easier than starting from scratch. CBS News reports record sales of small businesses in recent years, citing retiring baby boomers, a tight labor market for new employees, and decreased regulation as factors contributing to the boom. A new business owner can begin making money right away, benefitting from an already established customer/client base, and can make changes and improvements gradually.

Before purchasing a business, however, it is important to do some research, and to consider the advantages and disadvantages of various purchase options. A prospective buyer’s due diligence examination should include such factors as:

The status of any leases: If the business property is leased, does the property owner have to approve of any transfer? Will a new lease have to be signed, and, if so, will the amount increase? Is the current lease expiring soon, and, if so, will there be a problem with renewing it?

Outstanding contracts: The prospective buyer should find out if the business has any long-term employment contracts that may prevent him from hiring his own management team, for example. He should also be aware of any service contracts with suppliers, maintenance companies, etc.

Financial records: Certified copies of financial records, bank statements, ledgers, etc. should be provided so a prospective buyer can evaluate the financial health of the enterprise and estimate future potential profits. A restaurant may look busy, but an examination of the books may reveal that the actual profit margin is very low.

Zoning and environmental issues: Do not assume that the business meets all required zoning regulations. A long-standing business may be “grandfathered” in its current location, but a transfer of ownership may trigger new zoning rules that might make it difficult or even impossible to continue doing business. Environmental regulations can be a particular cause for concern. Purchasers of gas stations and manufacturing facilities should be especially careful in this regard, as it could cost hundreds of thousands of dollars to bring a property into compliance with environmental regulations.

After all preliminary investigations are completed, the buyer must decide if the purchase will be structured as an asset purchase or a stock purchase. Purchasing the stock in an existing company may make it easier to continue the business without interruption, but it will also make the new owner liable for all company obligations. A thorough search should be undertaken to determine whether there are any taxes owed, pending lawsuits, judgments, or other obligations.

An asset purchase may avoid some potential liability issues but may make it more difficult for a new owner to obtain necessary licenses or permits.

Additionally, a non-compete agreement may be appropriate when acquiring a business.

How can an attorney make the process of buying a business easier? A business attorney will help organize and conduct the necessary due diligence investigations and advise the prospective buyer on the best way to structure the purchase. Drawing up a purchase contract, negotiating the price and payment plan, reviewing any current leases or contractual obligations, and preparing a non-compete agreement for the seller to sign are all part of the attorney’s job.

Consulting an attorney before you make the decision to purchase a business will help you avoid some of the pitfalls that may turn your new dream into a nightmare. Call us at (814) 315-9255, or contact us here for more information.