Important Considerations When Purchasing an Existing Business

When purchasing an existing business it is essential to perform due diligence to acquire a full understanding of the assets and liabilities of the company that you are purchasing. It is also essential to negotiate terms into the purchase agreement that will allow you to protect your business from preexisting liabilities and from a default by the seller.

An existing business may be purchased by either buying the seller’s assets or buying the seller’s stock. The tax consequences of the purchase should be considered by both the buyer and the seller of the business. For example, where the seller is a C corporation, the seller may desire to sell its stock in order to avoid the potential for double taxation and the potential to be taxed at a preferential rate. In contrast, a purchaser may commonly seek to acquire an existing business through an asset purchase agreement because the purchase of assets may prevent a purchaser from assuming the seller’s liabilities and may allow the purchaser to select the assets that it desires while not purchasing the seller’s undesirable assets.

Generally, due diligence involves a review of the business that you intend to purchase, including its assets, liabilities, operations, transactions, and overall finances. Due diligence is commonly conducted by attorneys for purchasers after the purchaser has indicated its interest in purchasing a business, but before the purchaser and seller have entered into a binding agreement. Among other things, due diligence should include a review of financial documents, lien searches, current liabilities including amounts owed to any secured creditors, unsecured creditors, and employees, any intellectual property owned by the seller, any leases, contracts, or other agreements involving the business, tax liabilities, insurance, the seller’s licenses, registrations, and permits, and other similar documents.

Additionally, when purchasing an existing business, a purchaser must be careful to consider how it will finance both the purchase of the business and operations after the transaction has closed. With respect to future operations, before buying a business, the purchaser should consider whether the business will be able to fulfill its financial obligations and commitments, such as its obligations to vendors, lenders, and any retirement programs for employees. Moreover, the purchaser should evaluate whether the business’ debt to equity ratio is sustainable and within the norms of the business’ industry. Further, the purchaser should assess whether the acquired business will be able to pay financing expenses itself or whether it will require additional financing from a lender or the purchaser will have to expend its own cash.

These are only a few of the important considerations for a purchaser before it should enter into an agreement to purchase a business. In future postings, we will continue to discuss the issues confronted when purchasing an existing business.

If you have decided to purchase a business, the attorneys at Keithley Law, PLLC can guide you through the process, perform the necessary due diligence, and skillfully negotiate the purchase agreement. To schedule an initial consultation to discuss your purchase, contact Keithley Law, PLLC by calling (703) 454-5147