Buying a business is a substantial process that can involve significant investments of money and time, so here are some important questions to consider before you finalize your transaction.
When looking for opportunities for purchasing a business, it is essential to look at its valuation, its style of operation, and the potential of its industry.
It is also vital to be able to trust the seller. Even with due diligence, the seller still needs to provide crucial information. A lawyer will assess the credibility of the seller and make sure the documents are consistent with what the seller has disclosed.
A common misconception is that lawyers only are required for closing. However, when buying a business, it is crucial to engage a lawyer early (see article) as often transactions are complicated. Signing an agreement without knowing the full consequences can be detrimental. As long as there is serious consideration of the purchase, a lawyer can draft a letter of intent.
A good time to engage a lawyer is when there are agreements or contracts to review so that you can be protected. Sometimes, clients are unaware of the pitfalls in a case, and this is where a lawyer can help in saving time and money.
Lawyers usually charge by time (hourly rate multiplied by the number of hours). The overall cost will depend on the volume of work (see article). The legal fees will be in direct proportion to resources used, as well as in proportion to the purchase price. If the deal is complex and has a high net worth, then legal fees will reflect that. If the procedure is relatively simple, then the costs may be lower. Sometimes, assistance is only needed in only specific areas, which can help keep costs contained.
At an initial meeting, the client is usually required to bring their ID and the related documents. Even if they don’t have any documents signed, they can bring in drafts for the lawyer to review. The parties are often the determining factor when deciding how long the due diligence process will take (see article) — however, it usually is finished within 2 - 4 weeks, and the majority of work on a purchase can be completed within a month or two.
A letter of intent is a non legally-binding document that outlines the intentions of both parties. However, provisions such as confidentiality and deposit are binding once both parties sign. The buyer usually issues it as a way to formally initiate and propose a purchase to advance to the next stage.
The letter of intent will facilitate the transaction and start the due diligence process. It gives the seller an idea of the level of the purchaser’s commitment — a good starting point for negotiations.
The process of due diligence is one of the most important steps to purchasing a business (see article). At the end of the process, the client will have a clearer picture of the business they intend to purchase. The outcome is a full report of the findings, consisting of all due diligence search results. The lawyer will then explain particular problems to be aware of and will help craft the best possible transaction for their client.
The more knowledge a buyer has about a business, the better decisions the buyer can make. Learning as much as possible about the operations of the company will be very advantageous. For example, if there are multiple employees, knowing about any outstanding human rights issues or complaints will be beneficial in creating solutions.
The result of legal due diligence will help explain the current situation of the business, identify the risks, and structure the acquisition. For example, in a share transfer, the buyer inherits the entire company, including all liabilities. If there are substantial risks involved with a company, an asset purchase may be a better way for the purchaser. In this case, the buyer can select only the assets they want and leave the rest.
In contrast to the letter of intent, the purchase agreement, along with other ancillary documents, is legally binding. If the purchaser is committed to the completion of a transaction, the lawyer will address any problems. Agreements are typically drafted through several runs of negotiations before both parties agree on the terms.
If a lawyer becomes involved after the purchase agreement is signed, the only thing the lawyer can do is close the deal for the purchaser or the seller.
Closing documents will vary depending on the complexity of the transaction. Usually, the most important documents are the ones evidencing the transfer of ownership and money.
If money is borrowed to complete a transaction, a lawyer may negotiate terms with the financer on the buyer's behalf. It may be helpful to know that when a purchase involves financing, two transactions are occurring at the same time: one between the buyer and the seller, and another between the buyer and the bank. In some residential purchases, the lawyer may represent the lender and the buyer concurrently. For commercial financing, lawyers represent both lender and buyer.
Share purchases have higher risks than property purchases in terms of potential liabilities from the business to successors. Once you buy shares, you purchase the assets and the liabilities of the company as a whole. Typically, it requires more complicated and comprehensive due diligence to know what potential risks are involved. If the share purchase is not ideal, then asset purchase is an alternative way to structure the deal to complete the business purchase.
On the other hand, the cost to completion of is lower in share purchase because it is simply a transfer of shares.
In a share purchase, a lawyer will facilitate the physical transfer of ownership after the closing. They will also notify the municipality regarding the change in terms of a business license.
At this time, if the purchasers have established a transition plan with the seller, such agreement will be carried out. During this period, the new owner will learn how to operate by themselves.
A lawyer will continue to follow up with the steps and provide a written report to the client when all the items are complete.
