Top 7 Pitfalls When Buying a Business

Purchasing a business is exciting, but the process can be tricky and confusing. There are a variety of variables you should consider before signing on the dotted line. Here are seven common pitfalls:

  1. Not forming a business entity. Don’t begin signing contracts, leases, or loan agreements in your own name without planning and implementing your business entity. Making the investment to properly set up a corporation or LLC will help reduce the risk of your personal assets.
  2. Not thoroughly reviewing the purchase contract. It is common to negotiate details of a business purchase. Many details include property, trademarks, inventory, accounts receivable, and outstanding bills will need to be defined as to who exactly will be responsible and exactly how the responsibility will be transferred.
  3. Not knowing succession plans of the seller. It is important to do a careful review of the seller’s operating agreement to see how the transfer of interest would happen when a member wants to sell, dies, or is declared incompetent. The succession plan may reveal some unexpected scenarios.
  4. Not defining a non-compete provision. To protect yourself, you should include a fair non-compete provision in your agreement that would prohibit the seller from directly competing against your business.
  5. Not running a lien search. It’s important to know if there are any liens attached to any of the assets listed in the purchase agreement. Investing in a thorough lien search can be valuable to know that there aren’t any third-party interests in the asset. This will avoid future problems.
  6. Not doing proper due diligence. Researching a company’s financial history is essential. On the surface, they may appear successful and profitable, but if you dig a little deeper, you may find some surprises. Have a CPA review the company’s revenue and expenses and help you determine if the asking price is reasonable. Your CPA can do the research to find out what outstanding debt exists and what is owned, leased, borrowed, unpaid, etc., and to pour over the data to see if the numbers the seller is providing are accurate.
  7. Not reviewing commercial leases. Often, commercial leases have additional expenses that aren’t as obvious, and you should be aware of them to determine the true rental price. An attorney who specializes in commercial leases will sift through the details of the agreement and help you negotiate any potential problematic clauses.

Every business purchase transaction is unique. Working with an attorney and a CPA to tap into their experience will help you avoid these seven most common pitfalls. The 417 Business & Elder Law can help provide guidance through the muddy waters of the business purchase process.

This article was also published in the printed version of the Volume 12 Jul-Sep 2018 Newsletter (PDF).

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