What Are the Buyer’s Obligations When Selling a Business?

(This article was originally published on sarahsshepard.com)

Buying a business isn’t a simple, singular transaction. There’s more to it than scoping the place out, writing a check, and then taking over.?

As the buyer, it’s up to you to do your homework and take the correct legal steps to officially close the deal. You’ll also want to minimize any potential liabilities as much as you can to ensure the transition is not only smooth but so is your new venture. Plus, if you don’t come to terms with any legal obligations, you risk legal consequences once the business is in your name.?

This is especially true if the seller hasn’t provided you with all the necessary information about the business, in which case you could end up with lemon rather than an ongoing successful investment.

Arguably, the most important thing you can do to ensure you’re buying into a worthwhile business investment is to hire an experienced Alabama business lawyer to help you each step of the way. The next most important thing you can do is have all the necessary steps outlined in your responsibilities and obligations as the buyer.

Consider this your “buyer’s business checklist.” Then, keep reading to learn more.

Everything You Need to Know About Buying a Business

When it comes to buying a business, you have a lot of work ahead of you. Your most significant obligation is to vet the company in question to ensure that everything from inventory to financial records and any third-party agreements is up-to-date and compliant.?

Essentially, you need to make sure that everything is in good standing. Otherwise, you could end up with a business or even the business’s assets that are totally worthless. It can become even more complicated if you’re buying on behalf of yourself and a partner, shareholders, or investors.

Let’s just say there’s a lot of paperwork involved. Here’s what your obligations are as the buyer:

Determine the Price

The first thing you need to do is determine the price you’ll agree to pay for the business in question. This is reasonably easy if you’re already familiar with the type of business or industry you’re investing in. However, the purchase price is a critical part of the deal. It shouldn’t be taken lightly, regardless of your experience with buying businesses.

Suppose you have an acquisition target in mind but have little to no insight into what to offer in terms of consideration. In that case, in your best interest to hire a valuation specialist. This could mean calling upon an appraiser, a professional investment banker, an accountant, or a Huntsville corporate attorney.

Once you’ve determined the actual value of the business, you’ll be in a much better position to make an offer to the seller.?

Agree on a Deal Structure

This step may or may not apply to you, depending on your reason for buying the business. However, there’s more than one way to buy a business, and it all involves choosing a deal structure.

For example, you can choose an asset purchase, a merger, or even a stock purchase. Each option comes with its own set of laws and risks, so you’ll want to confer with Alabama business lawyers to see which structure is your best option.

Review and Sign a Letter of Intent

Once the purchase price and transaction structure have been determined, both you and the seller must enter into a non-binding agreement, otherwise known as a letter of intent (LOI).?

The letter of intent will be the most important legal document in buying a business. This letter should list the condition and terms of the upcoming transaction and the terms of the due diligence, the deposit required, and any other relevant terms and conditions associated with the agreement.

Additionally, you’ll be expected to draft a letter as well as the seller, and upon reviewing and agreeing upon the terms, you’ll be expected to make a monetary deposit. As the buyer, if you choose to make a large deposit, showing your intentions, you’ll have the right to request that the seller take the market’s business. This is what is referred to as a “no-shop agreement.”

Of course, since the letter of intent is meant to manage expectations for both parties and is non-binding, signing it only indicates your intentions of moving forward with the purchase. You can back out of the deal and get your deposit back at any time and with good reason.

You can think of a letter of intent as a good faith agreement that gives either you or the seller the right to break the deal should either party fall back on their promise.

Do Your Due Diligence

Due diligence is significant for the buyer as it’s the close examination of anything and everything about the business in question. The purpose is to verify all the necessary information and records about the company to see if anything comes up that could create any legal liabilities once you’ve officially become the new owner.

For example, there could be an issue with back taxes, environmental implications, pending litigations, contractual liabilities, and much more. As the buyer, you’ll be responsible for all of these things moving forward, which could make or break the success of your future venture.

Your due diligence is also what will ultimately help you negotiate your purchase agreement.?

For example, if you find in your investigation that there are certain liabilities you’ll be exposed to, you can request that the seller remove those liabilities as a pre-condition to closing the deal. Or, if you think you can handle those liabilities with minor issues, they could be used as leverage for a reduced purchase price.?

Should your due diligence investigation reveal certain liabilities that will be too much of a hassle, you can’t get the seller to take ownership of them. So, it’s perfectly acceptable to walk away from the deal.??

The importance of due diligence cannot be expressed enough. However, having said that, it’s important to note that it’s often a lengthy and expensive process. This is especially true if more parties are involved, as each party may turn up with different or even conflicting information.?

Therefore, you’ll need to get your Alabama business lawyer involved to review and verify the overall investigation before moving forward.

Negotiate the Purchase Agreement

As the buyer, you’ll be responsible for drafting the purchase agreement for the final price of the business you intend to buy. But, again, this is because you’re the one at a greater risk for a loss.?

Keep in mind, that the seller can counter your final offer. So, it’s in your best interest to have your Alabama contract attorney help you draft up this document and help you negotiate to get the best possible deal.

Get the Proper Consent and Approvals?

Before officially closing the deal, your next step is to ensure that you’ve obtained all the appropriate consents and approvals required to legally close the transaction.?

For example, a landlord’s consent may be needed for both parties, as may client consent or that of vendors, suppliers, stockholders, boards of directors, creditors, and any other third parties that the buying and selling of the business will affect.?

Suppose your due diligence has been conducted properly. In that case, it’ll include a review of all contracts for which the seller is responsible, including any contractual provisions that would legally require third-party consent?for the transaction to go through.?

Any consent or approvals not successfully obtained before closing the deal could result in the termination of the contract, financial penalties, and other types of legal recourse.?

Close the Deal

Closing the deal, also referred to as effectuating, is the moment when the official consideration is exchanged, and the transfer of ownership can legally occur. In other words, it means the deal is done and closed for good.

However, when it comes time to close the deal, you’ll want to review all your documentation, especially the consent and approvals, to ensure there’s nothing that can nullify the transaction later. As the buyer, you should be ready and able to deliver on the agreed-upon purchase price. The seller should be ready to provide additional documentation, such as stock certificates and so on.?

The closing can be done in person or remotely, as long as both parties approve and sign all the necessary documents. Once you’ve signed on the dotted line, you and the seller will declare the deal closed, and you are now the official owner of the business.?

As you can see, there’s a lot involved in legally buying or acquiring a business. If multiple parties are concerned, the entire process will be even lengthier and more expensive. Either way, it’s necessary to apply your Alabama business lawyer from the start of the impending deal.

If you’re thinking about buying a business, get in touch with us today to speak with Sarah S. Shepard or another experienced Huntsville corporate attorney. We can ensure you’ve got all your bases covered and make the right purchase decision.