Purchasing a successful small business can be a great way to contribute to the economy, create an income stream for its owner, and add a valuable asset to the owner’s wealth portfolio. Owning a small business can be the buyer’s main source of income, a side business, or an after retirement investment.
The acquisition of a small business is often seen as more financially feasible than starting a business from the ground up. However, “buyers beware” in that finding the right business to purchase and completing its acquisition takes planning and due diligence on the part of the buyer. The “due diligence” is required to assess the feasibility and affordability of the purchase for the buyer and should not be underestimated. A due diligence evaluation of a business should include financial, tax, and legal evaluations of the current business structure and operation. The due diligence should be tailored to whether or not only the assets of a business are being considered for purchase or whether its legal organization (for example, shares in the seller’s corporation or membership interest in its limited liability company) are to be purchased. Buyers are wise to engage professional assistance in order to complete this very important due diligence step from their financial, tax, and legal advisers.
The signing of a Letter of Intent (LOI) by both buyer and seller is often a first step, after preliminary buyer due diligence is completed. The purpose of the LOI is to make an offer to the seller, conditioned on the completion of buyer’s due diligence. Upon signing the LOI, an escrow payment is often made by the buyer to the seller to support a provision requiring the seller to take the business “off the market” for an agreed upon period of time in order to allow the interested buyer to complete their full due diligence evaluation. While the LOI should include the fundamental terms of the proposed transaction, it will not include all terms and generally should be legally non-binding. The buyer’s completion of their full due diligence evaluation of the business should be a condition for completing the purchase. If the buyer’s due diligence is completed to buyer’s satisfaction, and the parties proceed to complete the transaction, the terms of the LOI serve as the framework for the purchase agreement.
The experienced attorneys and staff at Thomas Law Group have helped hundreds of buyers acquire their small businesses. Please consider contacting us for legal assistance if you are considering a business acquisition.