In recent years, the trend toward FSBO (for sale by owner) businesses has created a reciprocal movement among buyers. Rather than depending on the services of purchasing professionals or business brokers, many business buyers are deciding to navigate the buying process on their own.
Although there isn’t any reason why a conscientious buyer can’t handle the transaction on his or her own, inattention to the small stuff can have some pretty dire consequences. In a business purchase, the devil really is in the details and oversights often turn into last minute deal-breakers.
Luckily, business buyers have many resources at their disposal. For example, online business-for-sale marketplace BizBuySell.com lists thousands of businesses for sale on its Web site and includes an entire section of resources for potential buyers. The site offers a “Buyer’s Workbook,” comprised of articles and checklists for every step of the buying process, from due diligence to a list of tasks at closing. Additionally, BizBuySell’s Valuation report can help aspiring business owners and business sellers understand the value of a business in their region.
A transaction’s purchase agreement, which essentially condenses the negotiated points into a single legal document, is the element of the process most likely to prevent a sale. If the buyer isn’t careful, he or she can end up tied to conditions and responsibilities that make a successful business purchase very difficult.
1. Purchase Description
Obviously, the purchase agreement has to accurately describe the business that is changing hands in the transaction. The business name, address and interests should be adequately detailed, and also include a brief summary of asset categories.
If the business is a multi-site operation, it is in the buyer’s interest to make sure all locations are included in the description. On the other hand, if the business leases space, the description must address the transfer of the lease to the new owner.
Rather than trying to list every single asset in the main body of the document, it is common to reference a more comprehensive itemization of assets in an addendum or schedule attachment. If the schedule doesn’t completely agree with the negotiated terms, it will need to be amended before signing.
The subject of price might seem like it should be the easiest issue to address in the purchase agreement, but this is not always the case. The price that came out of the negotiation process must now be more fully described because the values assigned here will reappear at final closing.
Typically, this means breaking the assets of the business down into categories such as “Inventory,” “Real Estate,” and “Equipment.” It is the buyer’s responsibility to make sure each asset category is given a value that is accurate and reasonable.
The reason it is so important to break the price down into categories can be described in one word: Adjustments. Between the time of the agreement and the final closing, the value of certain asset categories will inevitably change. For example, the continued operation of the business will result in changes in inventory. Since the new value has to be taken into consideration at closing, the purchase agreement needs to describe not only the current value of the assets, but also the kinds of adjustments that will be made before it’s a done deal.
3. Payment Methods
After the business description and purchase price have been described, the purchase agreement typically deals with how the buyer intends to pay for the business. Most buyers cobble together a variety of payment methods to complete the sale, each of which needs to be clearly discussed and identified.
Buyers should look for a clear schedule of payments with escrow agreements attached to any payments that are due prior to final closing. If the seller is financing part of the purchase price, the repayment schedule should also be described along with collateral requirements and interest details. This can become a sticking point if the seller expects to secure a first collateral position for assets that will be held as security by other lenders.
4. Seller Warranties and Responsibilities
When a business is sold, the seller makes certain promises to the buyer in the form of warranties. These warranties are an extension of due diligence for hidden threats or liabilities that would devalue the business or its assets. Since the majority of buyers aren’t aware of the issues that are covered in a standard warranty, it never hurts to have an attorney give the warranty section a little closer scrutiny.
Sellers also have several responsibilities that need to be taken care of before final closing, most of which relate to business operations prior to closing. Buyers want written assurances that the business they are agreeing to buy today is the business they end up with when everything is said and done. However, clauses giving the buyer continued access to company records prior to closing can easily be overlooked, creating a scenario where the buyer is not able to track the company’s status until the final documents have been signed.
5. Non-compete Clause and Dispute Arbitration
Two other details worth noting are a non-compete clause and provisions for dispute arbitration. In some cases, the value of the business can be rendered worthless, or substantially decreased, if the seller decides to re-launch a similar business and take his customers with him. Non-compete clauses prohibit sellers from engaging in similar business activities for a specified period of time – usually five years, or within a specific geographic region.
Arbitration provisions are another important detail since either the buyer or the seller could violate aspects of the purchase agreement prior to closing. If that occurs, an arbitrator can potentially salvage the deal by resolving the disagreement and holding both parties accountable for their responsibilities.
Even the most adamant do-it-yourselfer shouldn’t neglect a full legal review of the purchase agreement document. Attorneys deal with fine print everyday and are trained to protect their clients’ best interests. They can also help the buyer place the purchase agreement in escrow after it has been signed, which is a critical step because it effectively takes the business off the market while the buyer waits for the deal to be finalized. Additionally, the services of a business appraiser and/or accountant can also be extremely helpful during the purchase process for helping the buyer ensure they are properly understanding the value of the business they are about to purchase.
About the Author
Mike Handelsman is General Manager for BizBuySell, the Internet’s largest business for sale marketplace. Since 1995, BizBuySell has offered tools that make it easy for business owners and brokers to sell a business, and potential buyers to find the business of their dreams. BizBuySell lists over 50,000 businesses – spanning 80 countries – for sale at any time, with over 4,500 added or updated each month. BizBuySell also has one of the largest databases of sale comparables for recently sold businesses and one of the industry’s leading franchise directories. Please visit www.bizbuysell.com.