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Buying a New Small Business
By: James M. Maggio, Jr. (2000)
In the Nineteenth Century, a young Abraham Lincoln embarked upon his first business venture (a general store) by way of a simple handshake with its seller. While there is still validity to the old adage that you should not enter into a transaction with someone who you can't trust by way of a handshake alone, in our modern, more complicated world of sophisticated commercial transactions, a great deal more planning is necessary to insure the successful startup of a new small business.
The initial concern is finding the right seller and/or location. In the case of a sale of an entire business (one which includes the acquisition of the entity's name, site and goodwill), the location may be essential, since the perpetuation of the ongoing business may hinge upon its locale. (By contrast, purchasing assets from a business - such as inventory, fixtures, and/or accounts receivable - may be less dependant upon the location of the assets, and more on the quality of the assets being purchased).
In either scenario, a well drafted contract for sale is critical. The contract will address obvious issues such as price and quantity. However, it should also address environmental issues; the methodology for identifying inventory and receivables; contingencies such as financing; responsibility for outstanding debts and liabilities; and general due diligence issues. Due diligence relates to the purchaser's responsibility to investigate the records of the business and inspect the assets and physical plant, if any.
If the buyer is also purchasing property as part of the transaction, a real estate closing must take place as well. Conversely, if the buyer will be occupying rental space formerly used by the seller, negotiations with the seller (and possibly the landlord, if the existing lease requires the landlord's approval) may result in an assignment of lease (whereby the buyer steps into the shoes of the seller), or there is the possibility of negotiating a new lease with the landlord Thought must also be given to the creation of a formal business entity such as a partnership, corporation or limited liability corporation.
All of the negotiating, investigating, and preparation will ultimately culminate in a closing of the entire transaction. If done properly, the closing should entail the simultaneous occurrence of a number of things: exchange of the bill of sale for the business and/or assets;
funding of the transaction; execution of any deeds or lease agreements; satisfaction of any and all preexisting liens on the assets; assignment of any warranties and/or contracts; and any adjustments for taxes, utilities, and the like.
Proper preparation is the key to a successful business or asset purchase, fulfilling the promise of that original handshake.
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