key considerations for buying and selling a business
Share on Facebook
Share on Twitter
Share on LinkedIn

The most crucial aspect when buying a business is to ensure that the business does not have any underlying issues. If there are any problems, it is essential to make sure that the responsibility for those issues does not transfer to the new owner.

Once you find a business that interests you, you should take the time to identify any problems the business may have. Common issues to consider include the current owner using the business as collateral for debts, existing debts in the business’s name, involvement in lawsuits, or any current legal violations.

Apart from addressing these issues, the price of the business generally correlates with its revenue, making revenue verification equally important.

When buying a business, it is common practice to offer “Earnest Money” as a commitment, much like the process of purchasing a home. Just as when buying a house, after viewing the property and deciding to make an offer at an agreed price, a portion of the total amount, usually around 1% to 10% of the business’s value, is given as earnest money. This earnest money is provided as a sign of serious intent to purchase the business. Once the earnest money is given, a contract is formed, and a specific period, typically around two weeks, is set for the buyer to conduct a comprehensive “due diligence” review of the business. During this due diligence period, the buyer thoroughly examines the business’s financials, operations, legal status, and other relevant aspects to ensure they have a clear understanding of the business’s condition before finalizing the purchase. This process helps mitigate risks and allows the buyer to make an informed decision about the acquisition.

During this period, you must ensure to verify the business’s revenue, debts, hidden liabilities, and its ongoing operations.

Conducting due diligence is essential because, unless otherwise specified in the contract, deciding not to proceed with the business purchase after this period could result in the loss of earnest money or a potential breach of the business purchase agreement.

During due diligence, investigating debt can be a complex task, and achieving a perfect investigation may be challenging. However, businesses that utilize assets as collateral are generally mandated by law to register such collateral with the secretary of state. This registration process aims to protect others in case someone, other than the owner, holds a lien on the business or its specific property. As a business buyer, you can confirm whether the business has any liens by conducting a search with the secretary of state. It helps to identify any outstanding debts or claims against the business’s assets.

To avoid taking on hidden liabilities, it is recommended to acquire only the assets of the business rather than the entire company. As you may know, many people operate businesses through established companies. Opting to create a new company and acquiring only the business assets minimizes the time when the new owner assumes the previous company’s liabilities.

If you purchase the company that operates the business, you will inherit its responsibilities. However, if you only acquire the business’s assets, there is legal protection under the Texas business organization code that states the buyer does not assume any liabilities unless expressly stated otherwise in the contract. Therefore, it is advisable to purchase only the business assets when buying a business.

Sul Lee Law Firm | Phone: 214.206.4064
3030 Lyndon B Johnson Freeway, Suite 220, Dallas, TX 75234