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5 Steps – April 13, 2020

5 Steps to Buying a Business

Illustration by Drew Lytle

We are continuing to publish stories researched and written before the COVID-19 crisis, such as this one.


Thinking of buying a business? Zach DiIonno and Seth Buckley of Candela Law Group suggest five factors to consider.

 

1. Assets or stock?

Determine whether you are buying assets of the business (such as
equipment, intellectual property and inventory) or stock in the company. The answer charts the documentation path.

In most cases, asset purchases are favored by buyers because they are easier for due diligence and do not assume any unknown debts and liabilities.

 

2. This is yours, this is mine

Be very clear what is included – and what isn’t – in the purchase price. Detailed inventories and corresponding values leave less ambiguity.

Using a Letter of Intent during the negotiations is helpful; it’s generally non-binding and allows the seller and buyer to get on the same page (liter- ally) with the specific terms and conditions before a formal agreement is drawn up.

 

3. Do the due diligence dance

Some resources, such as online searches, the Better Business Bureau and other public information, can be researched before put- ting pen to paper.

Once you have a general agreement, the purchase and sale contract should clearly outline your right to a due diligence period, during which you can inspect the company’s books, financials, contracts, property, inventory and other critical items.

During this time, check for required approvals from third parties. Many documents – such as leases, licenses, permits and service contracts – require third- party consents for assignment that could take time to obtain.

 

4. Look out for your team

Employees can be the lifeblood of a company and a transition to new ownership might be challenging.

Are existing employees coming with you? If so, make sure you have contracts lined up with key employees and that they feel comfortable with your ownership team.

If you plan to move in a different direction, provide reasonable notice so employees can plan their transition too.

 

5. Don’t be exposed

Don’t rely on sample legal agreements off the internet in an effort to save money on legal costs. A well-crafted purchase and sale agreement can limit your risks and potential liability with respect to your particular transaction that a general template will not typically cover.

With so much at stake, good counsel and meticulous documentation can give you confidence that the deal maximizes your chances for success.

 

Candela Law Group
www.CandelaHawaii.com
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