Paperwork, specifically legal documents, is a prerequisite to buying any business. It doesnt make any difference if you buy a business once in your life or do it all the time, every business acquisition purchase contract is different and requires intense scrutiny on the part of the business buyer, much more so than the business seller. As a business buyer, each and every sentence within the business purchase contract needs to be read, understood and agreed to before you sign on the dotted line. This article will give the business buyer a quick fly-over of the most significant concepts one should understand relative to development and eventual execution of any business purchase contract. He Who Writes, Wins! If you have been consistently exposed to business contracts in your career, you quickly learn to appreciate the concept that, in development of most complex business agreements, He who writes, wins! Any attorney will tell you that it is always in his, his clients, best interest to be the author of the business contract to be signed in a two party agreement. As a business buyer, you want to be the writer of the purchase contact. If you personally cannot effectively write one, invest the money and have a competent contract lawyer write a purchase contract on your behalf. If the business seller, or their legal counsel writes the business purchase contract be sure you and your attorney evaluate every detail within. Always Maintain a Paper Trail Given the extraordinary amount of capital involved in most business mergers or acquisitions, coupled with the wide range of people, conversations, meetings and iterative business evaluation steps involved to effectively buy a business, it is imperative for the business buyer to maintain ongoing, copious notes of all related events and communication exchanged between themselves and the business seller or their designated representative, throughout the purchase process. There are three significant advantages for the business buyer in maintaining a paper trail of notes during the purchase process: 1) All key agreement points can be traced to a specific buyer/ seller conversation, 2) If something is written, it can be improved upon by either party, if it is not documented, the likelihood of refining the content is significantly reduced, 3) Sometimes related records can be incorporated into the final business purchase contract as an addendum or attached exhibit Buyer Beware! As a business buyer, you like to think that all business sellers are honest, forthright and have genuine intentions of developing a mutually beneficial business purchase contract. Most business sellers are! However, like in any complex asset purchase agreement, neither party knows what negative future consequences may surface in the ownership of the sold asset. More often than not, in a business purchase contract, its the business buyer who exclusively must address the problem not thought of or included in the final purchase contract. The negative consequences of many common business misfortunes can be reduced, shared between the business buyer and seller, or eliminated altogether with proper business purchase contract contingency language Fundamental Business Purchase Contract Concepts Listed below are some fundamental business purchase contract concepts that any prudent business buyer will want to incorporate in their legal due diligence and documentation fulfillment: Astute business buyers never present an offer to purchase a business without preceding it with a nonbinding Letter of Intent to purchase. (If you are not familiar with the purpose or advantages of use of a LOI, you must research this topic) Never make a purchase offer and certainly never sign a purchase offer or make an earnest money deposit until after you completed most of the due diligence required to effectively evaluate the business for sale. No business purchase terms should ever be communicated to the business seller without a written statement from the business buyer to the seller, specifically documenting, that any, and all, purchase terms are subject to analysis, justification and confirmation by an independent business appraisal entity, employed and paid by the business buyer. Be suspect of canned business purchase contracts provided by the sellers broker or representative, they are typically seller biased Be sure to negotiate a reasonable time period to evaluate and approve all documents provided to you from the business seller or their representative for your required due diligence Invest in an environmental analysis of the business premises and keep the business seller on the hook for any future environmental $ penalties or negative consequences realized as a result any documented negative environmental conditions made prior to the sale of the business If something does not make sense to you, ask, make sure you understand every detail Utilize all the expertise available to you from your intended primary lender on the deal If there are noteworthy levels of inventory and assets involved, inspect each item and use credible valuation expertise to determine approximate market value. This can represent significant dollars to you in the future as the business owner. All current legal encumbrances or extraordinary liabilities should remain the responsibility of the business seller Any discovered misrepresentations associated with documents provided by the seller or their designated representative to the business buyer, that surface in the future operation of the business should remain fair game for financial resolution, from the seller to the buyer, post purchase All records provided by the seller or their designated representative, to the business buyer should become an purchase contract addendum or exhibit and be subject to seller warranty of accuracy Lastly, there are published business purchase contract content checklists available, take the time to review these, especially business seller warranties and representations Typical business purchase contracts prepared by business sellers or their representatives often contain many provisions which are dangerous to business buyers. In many cases it is not what is written that is of greatest concern, it is what is omitted that represents a potential time bomb that will eventually explode long after the business seller has left town with your money. Take the time, invest the money, expend the necessary thought required to structure a mutually beneficial business purchase agreement with the business seller! |
