Buying a business, Part 3--Don't buy a lemon

At this point, you've found a business you think you'd like to buy, and you think you know how you're going to pay for it. How can you "kick the tires" to make sure that beauty you're buying isn't a lemon? First and foremost, have a specialist attorney draw a contract to purchase. This isn't like purchasing a boat or a pull-behind trailer, where a handshake and change of title might be all it takes. It needs to be put in writing, and put in writing by an expert who is aware of all the issues that can come up! Here is a list of items which, at the very least, you need to consider putting into your offer to purchase.

1. A sufficient due diligence period. More than anything, you need time to research the business to verify it really is in fact what you thought you were going to buy. So in your offer, make sure that there is a sufficient period to examine the business--often called an "examination period" or "due diligence period." You need to build in enough time to accomplish the following (which is not an all-encompassing list):
--Getting your related paperwork (loans, corporate papers, etc.) set up.
--Having a CPA review the profit and loss statements, as well as tax filings and other papers, in order to ensure the business really was as profitable as the seller claims.
--Having a real estate attorney check the title of any real property being purchased, as well as having the property potentially surveyed and inspected for structural issues (if it is a building).

2. Non-competition agreements. If the real value to "Bob's Superette" was the high level of quality that came to be associated with "Bob," you don't want to by Bob's business and then have him set up "Bob's Quick-Mart" the next day down the street. You need to consider from the outfront whether a non-compete is desirable (it almost always is), and have the basic terms put into the contract at the beginning, so that at the closing, when a non-compete agreement is handed to the seller, he knew it was coming.

3. Representations. The contract needs to contain affirmative representations of the seller, so that the seller warrants the business in many different ways, such as:
--no mistatements have been made about the business;
--there exist no outstanding lawsuits or claims against the business;
--the business is not in violation of any laws;
--the seller has good title to al business property being sold;
--the business' real property is not in violation of any environmental or zoning laws.

4. Employment of the Seller. You need to consider whether you should have the seller agree to remain employed at your company for a period of time after sale, to help as a consultant and to ease the transition. If so, at least the basics need to be in the offer to purchase.

5. The right to terminate. Your contract should state that you have the right to terminate and receive back any earnest money you've given if you discover that the business, prior to purchase, is not what you'd thought it would be.

This ist isn't exclusive, but should get you thinking. If you need more help, contact me at wldeaton@vnet.net or 704-460-7398.