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  • Writer's pictureJoe Dye Culik

So You Decided to Buy a Business...

One of the best things entrepreneurs and corporate refugees can do when going into business for themselves is to purchase an existing business. Acquiring a business already solidly rooted helps avoid many of the problems that occur when starting from scratch. If you buy a business with a proven track record, instead of spending years trying to get it off the ground, you’ll have a running start that lets you avoid some of the time-consuming and expensive startup issues.

So You Decided to Buy a Business in North Carolina or South Carolina
So You Decided to Buy a Business in North Carolina or South Carolina

But just as it is difficult to start and operate a business on your own, so is it unwise to buy a business on your own? You need to assemble a team. One of the first people you may interact with is a business broker, which, like a real estate broker, is engaged to help sell a business. Some buyers also engage business brokers to help them navigate the process available and sift through options.


Whether or not you are using a business broker, though, the buck stops with your attorney. You need an attorney on your side who can look out for legal issues while you make executive business decisions. The attorney for the buyer is often more involved in the transaction than the attorney for the seller. The buyer’s attorney usually takes the lead in drafting the deal documents, such as the asset purchase agreement, non-compete, and related closing documents.


Even if you have other professionals helping you, as a practical matter, all the information you receive will end up on your attorney’s desk at some point. The acquisition agreement memorializes all the pertinent terms of the deal, which means that anything of importance must be included in that paperwork. In the 21st Century, everything needs to be in writing because the handshake deal is now officially a relic. You will also need a CPA and other advisors who can guide you on unique aspects of the transaction, such as a banker or even a business coach.


As you review potential acquisition targets, you will probably be presented with “selling memoranda” that provide executive summaries of the offered businesses, their industries, representative portions of their financials, and other details. Make no mistake: these are marketing documents, not confidential due diligence information. These are only the first step in screening your acquisition. After you identify a target, that is when the real work begins. If you were buying a used car, you would look under the hood, and when you are buying someone else’s business, you must do the equivalent.


Signing a letter of intent and beginning the due diligence portion of the transaction is next. You and the seller will sign an agreement (a Letter of Intent) making preliminary commitments not to accept offers from other buyers. You usually are not locked in at this point, however, and the Letter of Intent establishes a period of time wherein you can fully investigate everything about the company. For example, you will likely need to look at tax returns, financial statements, contracts, employee information, licenses, and intellectual property, the condition of assets being sold, and a wide variety of other things.


You will also need to decide whether the transaction should be structured as an asset purchase agreement (APA) or a stock purchase agreement (SPA). We have written about that extensively before, and most acquisitions are asset purchase agreements. No two deals are the same, though.


During due diligence, your attorney will begin drafting the acquisition agreement or asset purchase agreement. This is typically the most active part of the case, legally speaking, with the significant interplay between the disclosures being produced, your responses, related negotiations, and the memorialization of the final agreed terms that address these issues.


Two important principles to remember are knowing yourself and your adversary. Be aware of your pain thresholds, what sorts of compromises you are willing to make, and even what types of risks you are willing to take. Likewise, do not forget that the seller is your adversary for the purposes of this agreement. The seller’s goal is to get as much money for as little as possible, so be mindful that their incentives are the opposite of yours, even if the deal is a friendly one. You can trust, but you must verify.


When the deal finally closes, which it probably will, you will have gotten a good deal if there are no surprises after you start running the business. And if your attorney has properly drafted the representations and warranties and the indemnification provisions, you can be certain that if there are any surprises, you will have both rights and remedies agreed up in the agreement you negotiated.


In conclusion, what you initially see is not always what you get, but if you do your due diligence and examine your acquisition target with the help of an experienced attorney and a team of experts, then you will get what you have seen.


Dye Culik PC is a Charlotte, North Carolina business law firm concentrating is practice in mergers and acquisitions and other areas of corporate law. If you are considering buying a business or need legal assistance selling a business, contact us for expert guidance throughout the process.


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