How to Protect Yourself When Buying a Company
March 23, 2022
Buying a business is not like buying a house. Of course, the home inspector may miss something during the course of their assessment which could lead to the purchase of a bit of a money pit. Miss something when doing due diligence in the course of purchasing a company and you may find yourself in severe financial and legal trouble.
The prospect of buying a company to become your own boss or to expand your business operations can be exhilarating. You simply need to make sure that you protect yourself, from first contact through closing the deal. The best way you can do that is by working with an attorney who specializes in business law.
At Coppaken Law Firm, we not only practice business law, but Attorney Jeff Coppaken was also in the business world for a decade before going to law school. We combine business experience with reliable legal advocacy to serve clients in Overland Park, Kansas, Kansas City, Missouri, and throughout Jackson and Johnson counties.
Steps to Protect Yourself
When Buying a Company
If you are purchasing a business in its entirety, you agree to take the good with the bad. Most companies are going to have both, so you should take the following steps to protect yourself.
Begin with a carefully-crafted letter of intent to be signed by you and the current owner of the company. The purpose of the letter is to express your interest in buying the company and the company’s agreement to suspend negotiating a purchase with any other party. The terms of that suspension should be clear and detailed. It should also be clear that you are not making a commitment to purchase the company, only to investigate the company more fully within a certain period of time. You would be wise to work with a business law attorney to craft this letter, especially if the business owner asks you to relax any provisions you request them to honor.
Thoroughly investigate the company’s history and legal status. Do not rely on the owner to fully disclose all pending lawsuits, investigations, and other legal matters. You will need to explore all potential avenues from Better Business Bureau complaints and workers’ compensation claims to collection actions filed against the company. Verify that the company’s corporate structure is appropriate and that it is in full compliance with that structure in its operations. You may decide these are liabilities you don’t want to buy.
Conduct a deep review of the company’s financial history and current financial status. Review several years’ worth of tax returns, profit-and-loss statements, accounts payable and receivable, bank statements, investments, liabilities, and debts. You may want to hire an accountant to help with this review.
Assess inventory, equipment, and real property to ensure their condition. You will need to consider the cost of repairing and replacing any of these when agreeing to a purchase price.
Review and assess existing contracts, including leases, vendor contracts, employee contracts, and those related to ownership of intellectual property. If you will need to honor them, or if you need to rely upon them remaining intact, you need that information before you buy.
Ask the business owner to sign certain documents that can protect your purchase, including non-compete agreements and truth-in-disclosure agreements. You may also want them to agree to withhold the final purchase price for a period of time during which you can verify the seller does everything agreed to prior to the close of the sale.
Hire an experienced mergers and acquisitions attorney. This list of steps to take should convince you of the value of working with an attorney to protect you throughout the process.
What Are the Potential Pitfalls
and How Might I Avoid Them?
There are potential pitfalls in every step of the process. First and foremost is the temptation to cut corners on due diligence. Due diligence can be exhausting and costly, but investing adequate time and money is necessary to keep you from buying expensive problems with even more expensive solutions.
Remember that everything you learn about a company’s assets and liabilities helps you establish the value of the purchase price. A failure in any of the preceding steps has the potential to ruin you financially. You need to know every “buried body” to look for and where to look for it. If, for example, you fail to uncover that the company’s liability insurer is dropping them as a result of one too many personal injury lawsuits, you inherit the insurer’s departure and the challenge of finding coverage elsewhere.
How Can a Business Attorney Help Me?
Buying a company is like crossing a minefield. The walk may seem to be fine until you step on a mine you didn’t know was there.
Don’t take that walk alone. A mergers and acquisitions attorney knows how the process works and the exhaustive list of items that need to be explored. Your attorney helps you navigate the minefield, protecting your best interests and financial investments.
Rely on Coppaken Law Firm
At Coppaken Law Firm, we have walked dozens of clients from Overland Park, Kansas, and Kansas City, Missouri, through mergers and acquisitions. We have also seen what happens when a buyer fails to do their due diligence, either out of inexperience, haste, or incompetence.
Don’t let that happen to you. To begin your journey to buy another company, call Coppaken Law Firm now. We are prepared to take that journey with you.