How to Buy a Business in Four Steps
Are you looking to buy a business instead of starting one from the ground up? Buying an already established business is an alternative way to realizing your entrepreneurial dream without building a business from the ground up. Follow these steps to move forward.
1. Do Your Research
This may seem obvious, but buying a business should not be a spur of the moment decision. Take the necessary time to figure out what you’re getting into. How much will it cost? How much time will it take? What resources will I need (attorneys, real estate agents, etc.)? Is this business going to be my full time job, or will I hire someone to run the day-to-day aspects?
2. Sign a Letter of Intent
The Letter of Intent (“LOI”) is not a binding contract, but it does state exactly what it says, that you intend to purchase the business. It also lays out the terms that you and the seller will discuss before you enter into the purchase agreement. Even though it is not binding, it is important that you are serious about entering into the transaction. You aren’t guaranteed to buy the business at this point, but you can only get out of the transaction with good reason (i.e. you find a problem when you perform due diligence, explained below, the buyer goes bankrupt, etc.)
3. Perform Due Diligence
Just as you wouldn’t buy a house without a home inspection, you also shouldn’t buy a business without looking into its financial background. Due diligence is the process of performing an in-depth look into the finances of the business. You should look at the business’s accounting and records, financial statements, bank statements, tax returns, the Operating Agreement or Bylaws, any contractor/vendor/employment agreements, Secretary of State information, licensing/zoning information, etc. This is the most lengthy step in the process of buying and selling a business, as the seller needs to gather all the requested information, and that can often take months. You should go through the documents provided by the seller with an attorney and an accountant, to ensure a trained professional can review and offer any advice and express concerns, if any.
4. Negotiate the Purchase Agreement and Close
After due diligence is performed, the parties will discuss and negotiate the terms of the purchase agreement. A purchase agreement is a formal legal contract that outlines the terms of the sale. The purchase agreement typically is signed by the parties shortly before officially closing, with a “bill of sale” signed at the closing date. Once the closing is complete, you officially own the business.
Are you considering purchasing a business? G&G Law can help with that! Contact us.