May 7, 2010

Ten Things To Look Out For When Buying A Business [Part 2 of 2] Cliff Ennico www.creators.com Here are several more points that purchasers, and their lawyers, frequently overlook when negotiating to buy a small retail or service business. Negotiate a #147;Letter of Intent#148;. Also called a #147;term sheet#148;, a letter of intent (or LOI) is a short, two or three page letter agreement between the buyer and seller of a business that spells out all of the important terms and conditions of the sale. For example, the purchase price, how and when the purchase price will be paid, the assets that will be sold to the buyer (and those the seller will keep for his own use), the terms of the seller#146;s noncompete agreement, and so forth. While LOIs are technically not binding on the parties, it is well worth the time and effort to hammer out as many of the business issues involved in an LOI before the lawyers begin drafting the #147;definitive#148; legal contracts that will document the sale. A well-drafted LOI helps the lawyers get the sale documents right on the first (or possibly the second) draft, since most of the important terms and conditions will already have been dealt with in the LOI and are not subject to further negotiation. Without a LOI, you will end up negotiating the business deal and the #147;legalese#148; of the definitive documents at the same time, requiring multiple drafts of the sale documents and tons of money in legal fees. Watch Out for Bulk Sales Laws. Most states have done away with these, but many states still require the buyer of a business to notify the seller#146;s creditors that the transaction is going on. Failure to get a list of the seller#146;s creditors and send #147;notices of sale#148; to them may give the seller#146;s creditors a shot at undoing (or #147;rescinding#148;) the transaction in order to prevent the seller#146;s assets from being sold out from under them. Even if the seller has no creditors at all (a rare occurrence), the state tax authority generally wants a copy of the #147;bulk sales notice#148; so it can determine if the seller owes any sales, use or other business taxes. If the seller does, he will have to pay them before the closing takes place. Get an Indemnity from the Seller. Even if you and your advisors have torn apart the seller#146;s books and records, sometimes things get overlooked, and you find yourself getting sued because of something the seller did (or failed to do) before defend the lawsuit and pay all judgments and fees if that should happen. Likewise, you should be prepared to give the seller an indemnity if he gets sued because of something you do (or fail to do) after the closing takes place. Make Sure the Seller Sticks Around for a While. In many retail and service businesses, the customers have a personal as well as business relationship with the owner. Make sure the seller sticks around for a couple of weeks after the closing to introduce you to customers, help you figure out the books, and #147;ensure a smooth and orderly transition of the business#148;. Consider paying the seller for his time so he has an incentive to stay off the golf course, at least until you are comfortable you know what you are doing. Get to Know the Employees. Likewise, before you buy a business, make sure the #147;key employees#148; are willing to stick around, since they#146;re often the ones who see the customers day to day, operate all the tricky machinery, and know #147;where the bodies are buried#148;. Many sellers will be reluctant to let their employees know the business is up for sale, for fear they will quit en masse. In that case, put a provision in the sales contract as follows: #147;Seller and Buyer will announce the proposed sale to all employees of the Business within forty-eight hours before the Closing, and Buyer will be given a reasonable opportunity to meet with each employee individually before the closing date to determine, to Buyer#146;s reasonable satisfaction, the employee#146;s willingness to continue working for the Business.#148; Then add a provision allowing you to walk from the deal if you are not totally satisfied that the key employees will stay on board at least long enough for you to learn what they already know. Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. His latest book is #145;Small Business Survival Guide#146; (Adams Media, $12.95). This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2005 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com.

Posted by Staff at 1:48 AM