Buying a company can be tricky. There are multiple steps to manage and countless pitfalls to avoid. Meanwhile, you must also navigate the legal red tape to prevent costly mishaps. Here is what you should know before signing on the dotted line.
Buying a company is intimidating, even if it’s not your first time. There are mountains of paperwork to manage, multiple elements to consider, and many questions to ask or answer. The process is also lengthy and complicated, with the help of a business lawyer typically required.
Alternatively, buying a company can be satisfying and lucrative. Make the best acquisitions and enjoy long-lasting success. Choose the wrong business or cut corners and suffer costly consequences. This guide will show you what to consider and warn you about the potential pitfalls.
What happens when you buy a small business? What events can you expect, and how can a business lawyer help ensure an optimal experience? Let’s begin by discussing what makes corporate acquisitions so complicated.
Table of Contents
Why Business Acquisitions Can Be Complicated
The 8 Primary Causes of Complications When Buying a Business
Five Things to Consider When Buying a Company
#5. Licenses, Qualifications, and Permits
Other Considerations When Buying a Company
Why Business Acquisitions Can Be Complicated
Buying a company means monitoring and managing several aspects simultaneously, many of which may be new and unfamiliar. It requires hiring lawyers, financial advisors, insurance advisors, accountants, and more. The sheer number of respondents is eclipsed only by the responsibilities. Miss the tiniest mark, and deal with defeat.
Both sides want to come out victorious after an acquisition. Neither party desires too much of a compromise, yet both parties must make the transaction worthwhile. Negotiating a transaction in a way that makes you and the other party simultaneously feel like they are winning takes intense focus and dedication.
Complications can arise at any time and sometimes without warning. You have to navigate human emotions, missed opportunities, and disagreements. Steering everything to an agreeable conclusion is challenging, even for the seasoned business lawyer, entrepreneur, or executive.
The 7 Primary Causes of Complications When Buying a Business
“If you think the process of buying a company is tricky, imagine doing it without considering the possibilities of what may go wrong.”
Evaluating the pros and cons of your proposed acquisitions is essential. When doing so, think about these eight potential complications and develop an effective strategy to mitigate them:
- Poor Motivation
- Lack of Integration Plan
- Valuation Gap
- Loss of Stakeholder Trust
- Inadequate Due Diligence
- Ignoring Red Flags
- Unforeseen Circumstances
You might encounter unexpected conflicts if the motivation to buy or sell is lacking by either party or if your advisors lack the incentive to act quickly and efficiently. TIME KILLS DEALS! Keeping all parties motivated and moving quickly is the single most effective strategy to ensure a smooth transaction process.
Meticulous market research can help give you the upper hand in negotiations. It can also provide stakeholders, investors, consumers, and partners confidence.
The business buying process can also fail if integration is unsuccessful or your team forgets the primary objectives, and mitigating that risk takes careful planning. However, each acquisition is different. Your business lawyer should walk you through the unique circumstances surrounding your activities and will help you watch out for red flags that may foretell future complications.
Finally, sometimes certain events happen that are just outside of your control. For example, interest rate hikes announced by the Federal Reserve may impact your cost or availability of financing. When these events occur, it is important not to react emotionally but rather analyze, identify and analyze the various options available to mitigate the event, relying on the expertise of experienced legal counsel and other advisors, and revise your strategy accordingly.
Five Things to Consider When Buying a Company
Buying an existing business is never straightforward. There are multiple factors involved, and integration isn’t always smooth. The deal might also look good on paper but be unwise for your brand, so considering the realities is crucial.
“You can’t manage mergers or acquisitions on a whim or with your intuition. The best deals are data-driven.”
You must perform thorough due diligence on the target, but equally as critical to a successful closing is ensuring that the target performs enough due diligence on you to be comfortable with you as a seller. Prepare yourself before your initial meeting with a seller to make a positive first impression, including refining your goals and investment thesis.
Carefully examine the zoning laws and environmental regulations to ensure your business can lawfully conduct commerce there. This is where an experienced business lawyer is critical. They can help you with the administrative paperwork and produce or examine certificates of good standing. Depending on the circumstances, some might help draft or file letters of intent, leases, and contracts.
Start by understanding the general outlook for the business you want to buy. Then compare its performance to similar companies in the industry. Afterward, consider these five things:
#1. The Financials
Arguably the most important piece of diligence in the buying process is a thorough evaluation of the business’s financials. Hire an experienced quality of earnings provider or other accountants with experience conducting a quality of earnings review to help gather, review, and decipher the target’s financial statements. Ask them to review the company’s primary fiscal indicators to determine average sales, debts, profits, and losses. They will also perform cash flow analysis and track the target’s expenses.
This process is critical in revealing anomalies, red flags, and other hidden concerns, if there are any. Many deals that end up falling through happen at this stage, so performing the review as early as possible in the process can save you weeks of headaches and additional costs.
Equally as important as just collecting relevant historical financial data is collecting updated financial data. The transaction process can take months to complete, and a lot can change in a business’s quality of earnings and financial picture in those intervening months. Don’t forget to receive updated financial data through the process before signing an acquisition agreement and again before closing.
TIP: Get a complete picture of the potential by identifying trends and comparing margins.
#2. The Legal Liabilities
Buying a company requires diligent consideration of multiple local, state, and federal laws. A business owner must obey applicable laws and regulations and balance those with industry expectations and corporate interests. As a small business owner, you’re open to litigation, and losing a case over avoidable circumstances can be painful.
Don’t become a party to a lawsuit when buying a company. Discover whether the business has any outstanding legal liabilities. If you acquire the equity of a business, you will inherit those liens and judgments and become responsible for their timely resolution. For this reason, many business buyers elect to pursue an asset purchase, which can significantly limit your exposure to pre-existing claims and judgments.
TIP: Perform background checks on the executives to ensure a seamless acquisition.
#3. The Operations
Check out how the company operates, from handling inner-office conflicts to managing budget concerns. Do they have an established methodology that effectively identifies, evaluates, and solves inevitable issues in their operations? Will your team have to develop a strategy to maintain operational efficiencies, or is there already one in place?
Determine the who, what, when, where, and how. Ensure the company runs smoothly even when executives are elsewhere. See for yourself, and don’t take the word of someone with a stake in the game. Make a checklist to assess everything from manufacturing and distribution to human resources and sales.
TIP: Analyze the company’s capital expenditures to find concerning patterns or potential opportunities.
#4. The Reputation
Your reputation matters to consumers, investors, and stakeholders. They don’t want to get involved with businesses that have poor customer service or are surrounded by controversy.
“A bad reputation signals low-quality products and disappointing customer service to potential customers or clients.”
It can take countless hours of targeted PR work to fix poor public perceptions and increase traffic. Perform thorough diligence on a target, online and through customer interviews, if permitted, and look for red flags that suggest the acquisition will come with scrutiny. You might also have to consider hiring an executive branding expert to rewrite your company’s core values.
TIP: Use social media and other public platforms to take the market’s temperature.
#5. Licenses, Qualifications, and Permits
Never overlook the importance of reviewing a target’s licenses, qualifications, and business permits directly with the issuing authorities. Copies provided by a company during the diligence process are often original or, at best, out-of-date copies of licenses. Reviewing these items directly with the issuing agencies is an essential process in due diligence that could save you a headache before or after closing. Buying a company without the necessary business licenses currently in effect may require a temporary suspension of operations, which can be costly in multiple ways.
Don’t close the deal until you verify the correct filings. Check that the company is qualified and in good standing in each state where it conducts business, both with the Secretary of State and the applicable state taxing authorities. Ensure that all permits and licenses are up-to-date and the business is eligible to operate without interruption from regulatory bodies. Finally, plan in advance to ensure that the company can deliver a “Certificate of No Tax Due” or its equivalent for each applicable State taxing authority before closing. If you borrow funds from a lender to finance the purchase of the business, this will be required by the lender, but even if not, it’s an important step in the diligence process.
TIP: You must have a valid and effective business license or permit when buying a company to operate immediately after the closing.
Other Considerations When Buying a Company
Buying a company often means balancing several objectives and developing a strategy to satisfy them. However, effective purchases don’t rely solely on the fundamentals. You must also consider the finer details to ensure a smooth transition.
Don’t attempt buying a company until you consult with experienced legal counsel. You could miss essential details that could negatively impact your bottom line. Be sure to establish and follow best practices when negotiating your deal, and don’t be afraid to pull out if you can’t negotiate a transaction on acceptable terms or if you see or feel that something is off. Trust the data, but also trust your gut!
Then prepare for an efficient meeting with your business lawyer by reviewing this checklist.
Entity Status: Confirmed.
Ensure a favorable outcome. Have your business lawyer validate the status of the following:
- Bylaws
- Resolutions
- Operating Agreements
- Good Standing
- Foreign Entity Status
- Industry Registrations
Business Outlook: Checked.
Evaluate the company’s current growth potential and then compare that with your objectives. Here are a few things to consider to develop a comprehensive outlook:
- Commercial Interests
- Market Trends
- Competitive Advantage
- Target Audience
- Supply Chain
- Marketing Strategy
Also, answer the following questions:
- What risks and opportunities exist in the company’s supply chain? What impact would a change in suppliers have on the business?
- Which goods or services make up the bulk of sales?
- What sort of customer concentration does the business have
- How are employee relations, and is there any key man risk associated with important employees that may not stick around after closing?
- Is customer satisfaction where it should be? What sort of online reviews does the business have, and does the company appropriately and efficiently respond to negative reviews or criticism?
Physical Assets: Evaluated.
Identify the physical assets that will be included in the acquisition, then compare them to your liabilities and expenses. You will want to review the following:
- Equipment
- Intellectual Property
- Research & Development
- Inventory
- Real Estate
Laws & Regulations: Reviewed.
Conduct thorough due diligence when buying a company by ensuring appropriate compliance with laws and assessing future litigation risks. Here are several material items to consider:
- Environmental Liabilities
- Permit Violations
- Revoked or Lapsed Licensing
- Employee or Labor Disputes
- Customer Disputes
Buying a company is a complicated process you can’t afford to take lightly. Your deal not only involves millions of dollars and potentially even personal guarantees, but more than that, it’s your and your family’s future.
“Develop a comprehensive strategy to avoid unnecessary mishaps or oversights.”
You can’t mitigate every potential risk that exists, but you want to be able to lay your head down at night knowing that you did everything in your power, without cutting corners, to protect your investment.
