Purchasing a Business
What to Expect When Buying a Business
Acquiring a business stands apart from typical purchases. Every business is unique with its own customer base, market position, and regulatory framework. This complexity means that legal guidance must be customized for each acquisition to address its specific challenges and opportunities.
The process typically involves:
- Initial negotiations and letter of intent
- Due diligence investigation to uncover any issues
- Structuring the deal (asset vs. share purchase)
- Purchase agreement negotiation and drafting
- Closing with all necessary documentation
Important Concerns When Buying a Business
Due Diligence is Critical
The legal work isn’t just paperwork – it is protection against future legal and financial problems. It is an essential safeguard that identifies risks and liabilities before they become problematic.
Key Areas Requiring Investigation
A comprehensive due diligence process should examine several critical areas. The investigation typically covers financial statements and tax matters to assess fiscal health and potential liabilities. Employment issues require careful evaluation to identify workforce challenges. Significant contracts and lease agreements need scrutiny to ensure transferability and favorable terms. Any outstanding litigation or potential claims should be disclosed and assessed for risk. Intellectual property rights and registrations must be verified to confirm ownership and proper protection. Regulatory compliance and industry-specific issues need thorough examination to prevent unexpected legal complications post-acquisition.
Structure Matters
When acquiring a business, there are two primary ways to structure the deal: as an asset purchase or a share purchase. The chosen structure will significantly impact various aspects of the transaction, including liability exposure, tax consequences, necessary third-party approvals, and ongoing legal responsibilities. Each structure offers distinct advantages and challenges that must be carefully considered in light of your specific business objectives.
In an asset purchase, the purchaser selects and acquires specific assets of the business while leaving behind certain liabilities. This structure gives greater flexibility to cherry-pick desirable assets and avoid problematic liabilities. Asset purchases typically result in a stepped-up tax basis for the acquired assets, potentially providing valuable depreciation benefits. However, this structure often requires more third-party consents for contracts and may trigger transfer taxes.
A share purchase involves acquiring the ownership interests in the business entity itself, thereby inheriting all assets and liabilities of the company. This approach is generally simpler from a transaction perspective, with fewer transfer requirements for contracts, permits, and licenses. Share purchases maintain the business’s continuity, which can be valuable for preserving customer relationships and employee morale. However, this structure exposes the purchaser to all historical liabilities of the business, known and unknown, making thorough due diligence absolutely critical.
The Business Lease
Purchasers often overlook and underestimate the importance of the lease agreement when acquiring a business. What seems like a mere administrative detail can actually become one of the most consequential aspects of the entire transaction. Deals often collapse at late stages due to lease issues that could have been identified and addressed early in the process, resulting in significant wasted time and resources.
Every lease agreement contains critical elements that directly impact the value and viability of your business acquisition. These include transferability provisions, landlord consent requirements, duration terms, renewal options, rent escalation clauses, and use restrictions. The transferability of the lease is particularly crucial for location-dependent businesses, where favorable lease terms can make or break the operation’s success. Each situation is unique and requires independent review by qualified legal counsel who can identify potential issues before they become deal-breakers.
Timing is everything when addressing lease matters in a business acquisition. Getting the landlord involved early in the process is crucial, as many landlords see a business transfer as an opportunity to modify terms or require additional guarantees. Delaying this engagement often leads to last-minute complications that can derail an otherwise promising acquisition. What seems like a minor detail in the early stages can quickly transform into an insurmountable obstacle if not properly managed from the outset.
Why You Need Specialized Legal Counsel
When buying a business, specialized legal counsel is essential due to the inherent information asymmetry between buyers and sellers. A law firm that specializes specifically in business acquisitions brings expertise in uncovering hidden liabilities and potential issues. Focused experience allows Adamian Law to anticipate industry-specific challenges and regulatory hurdles that can derail a business transaction. Adamian Law has developed refined due diligence protocols that systematically identify risks while structuring appropriate protections in purchase agreements.
This information provides a general overview only. Each business acquisition involves unique circumstances requiring tailored legal advice.