7 Things to Look Out for When Buying a Business

You’re buying a business and have already “shook hands” on the deal. But there are some things you should insist on before you close.

  1. Negotiate a “letter of intent”: An LOI is a short agreement between the parties that spells out all the important terms and conditions of the sale. It will include the purchase price, how and when the purchase price will be paid, the assets you will buy, what will remain with the seller, terms of the seller’s non-compete agreement and so on. While LOIs are not technically binding, it’s worth the time and effort to hammer these details out so these topics are no longer up for negotiation.
  2. Review Sales by Customers: During due diligence request a list of sales by customer for the last 3 years. Ask about any material changes.
  3. Find out if you can assume the sellers lease: If the seller is leasing space, find out the term of the lease and whether the landlord will let you assume it “as is” without a rent increase. Also, determine if the landlord holds a security deposit. If so, the seller will probably want you to purchase the deposit – over and above the business purchase price. If the deposit is included in the seller’s price, get it in writing.
  4. Are there prepaid expenses: Does the seller have any long-term prepaid expenses, such as advertising or social media? Chances are your closing will take place during the contract period. Expect that the seller will want to be reimbursed for these expenses. Be sure to ask the seller for a list of “closing adjustments,” those prepaid expenses that need to be pro-rated for the closing.
  5. Get indemnity from the seller: Even if you inspect the seller’s books and records, sometimes things are overlooked. This could lead you to being sued because of a seller’s actions prior to closing. An indemnity assures the seller will defend the lawsuit and pay all judgments and fees. Likewise, you should give the seller indemnity if he is sued for something you do, or fail to do, after the closing.
  6. Make sure the seller stays involved in the business for awhile: In many businesses, the customers have a relationship with the owner. Develop an agreement that the seller will remain involved in the business for a period after the closing. This will allow them to introduce you to customers and “ensure a smooth and orderly” transition of the business.
  7. Determine how you will announce: Create a written plan with seller’s input on how you will announce to customers, employees and vendors.