Corporate & Transactional
Checklist Before Buying A Business
Purchasing an existing company can be an excellent investment that provides many benefits and can be more profitable than building a new business from the ground up. However, the process of finding and transferring business ownership is complex. Before starting the purchase process, there are vital elements to review and organize. Taking a careful and well-thought-out approach can help ensure you find the right business and prevent losing an excellent opportunity.
Determine the Type of Business to Purchase
There are many things to consider before buying an existing business. The first is determining the type of business to purchase. Consider interests, needs, and the benefits of various fields.
Buying a business is a significant investment, and it is crucial to research and review every option available. While purchasing a business can be more profitable than starting one, there are additional risks. The vital pieces to research include the following:
The Type of Business Structure
The first thing to research is the way the owner legally structured and organized the business. According to the Internal Revenue Service, the business structure will determine many factors, including the annual tax return forms the owner will complete. The different business structures include:
- Limited liability company
- Sole proprietorship
- S corporations
The legal entity type will have a significant impact on business operations. Besides taxes, it will also determine the business owner’s liability.
Review the Articles of Incorporation
When business owners incorporate the entity, they must file articles of incorporation with the secretary of state in the territory where the business operates. The documents will provide detailed information about the company, including stock information, registered agents, and purpose.
The Business’s Operating Agreement
The operating agreement, sometimes called bylaws, provides business operation rules. It will include procedures for:
- Responsibilities of management
- Stock ownership
- The process of settling conflicts
- Responsibilities of the management team
Review the Business’s Certificate of Good Standing
A company’s certificate of good standing certifies the owner properly registered the entity. It will also verify that the business is up to date on state registration fees and in compliance with government regulations.
Review the Business’s Finances
Another critical step is to review the business’s finances carefully. Request and review all the entity’s financial statements and accounting methods.
Prepare and Issue a Letter of Intent to Purchase
A letter of intent to purchase, or LOI, establishes the potential buyer’s intention to take ownership of the business entity. It details the intention to buy the businesses, products, assets, and services. A letter of intent to purchase a business will proceed with the detailed purchase agreement the parties sign later down the road after they reach a deal. While the LOI is an essential step to buying a business, it is not the final agreement. A seasoned business lawyer at Amini & Conant can help complete the checklist before buying a business and drafting legal documents and contracts.
- The interest in buying the company
- Discussing the price to purchase the company
- Signing a nondisclosure agreement
A nondisclosure agreement or NDA is a contract prohibiting parties from sharing confidential information. It helps protect vital business operations from becoming public knowledge.
Follow a Due Diligence Checklist
One of the final steps to take in buying a business is completing a due diligence checklist. It is the process of verifying all the information about the company and ensuring it is accurate. The steps include:
- The review and verification of all financial data collected
- The final evaluation of the business structure
- Review all legal contracts with a legal professional to ensure accuracy
- Go over company asset documentation carefully
Completing a due diligence checklist is a careful and in-depth procedure vital for ensuring the buyer has all the pertinent information before finalizing the purchase.
Secure Financing to Purchase the Business
There are many ways to secure financing to purchase a business. All financing options come with their own set of positives and negatives. Two of the most common ways to acquire a business include:
SBA-backed loans help future business owners secure the financing they need to purchase a small business. Per the United States Small Business Administration, SBA-backed loans reduce lender risks by setting guidelines for loans that buyers must follow. The benefits of SBA-backed loans include the following:
- Competitive rates and terms
- Education and counseling
- Unique advantages that private business loans do not provide
The negatives of SBA-backed loans include the following:
- Personal liability if the business defaults
- A long process for approval
- Few options for people with low credit scores
Private Business Loans
A private business loan is like other personal loans, specifically for business owners. SBA-backed loans often require the borrower to have a better credit history, but they usually offer longer terms and better rates than private loans.
Sign the Purchase Agreement and Close the Dea
After securing financing to buy the business, the last critical steps are signing the purchase agreement and closing the deal. The agreement will cover all the details between the two parties, including the property transfer. Finally, it is time to sign contracts to transfer business ownership. The closing documents will include a promissory note, security instrument, or deed of trust.
Buying a business is a huge decision and requires careful review and consideration as well as offering many benefits, but you must carefully complete all the steps for due diligence. Taking critical steps could mean saving precious time and money or losing the opportunity to buy the company. The process is complex, and there are countless things to consider.