29 April 2024: Buying a Business: The Legal Issues
Buying a business is a significant, often life-changing event – usually the most significant event in the life of the buyer (at least until it’s time to sell!) – and it involves various legal considerations to ensure a smooth and lawful transition of ownership.
It doesn’t matter whether you’re acquiring a small family-owned, so-called “mom and pop” business or a $15 or $20 million enterprise, understanding and addressing the legal aspects of the purchase is essential for protecting your interests and avoiding potential liabilities. From due diligence to contract negotiation and compliance with regulatory requirements, several key legal considerations must be carefully evaluated and managed throughout the acquisition process.
One of the first steps in purchasing a business is conducting thorough due diligence. This involves examining the target company’s financial records, assets, liabilities, contracts, intellectual property rights, and legal compliance history. Due diligence helps the buyer assess the value and risks associated with the acquisition and identify any potential legal issues that may affect the transaction or the future operation of the company.
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But when buying a business a major part of due diligence is LEGAL due diligence. And that often takes a back seat to the financial due diligence that many buyers focus on. Common legal issues uncovered during due diligence include undisclosed liabilities, pending lawsuits, regulatory violations, and inadequate contractual agreements.
Once due diligence is complete and the buyer is satisfied with the findings, the next step is negotiating the terms of the purchase agreement. The purchase agreement outlines the terms and conditions of the transaction, including the purchase price, payment terms, representations and warranties, indemnification provisions, and any post-closing arrangements.
We’ve posted in the past about representations and warranties. This is an area of the agreement that is extremely important because, as a buyer, you don’t know what you don’t know. Reps and warranties, if properly drafted, can go a long way toward protecting the buyer from surprises that could pop up several years down the road.
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When buying a business, negotiating a comprehensive and well-drafted purchase agreement is crucial for protecting the buyer’s interests and minimizing the risk of disputes or litigation after the deal closes.
More Agreements
In addition to the purchase agreement, buyers may also need to enter into ancillary agreements such as non-compete agreements, confidentiality agreements, and employment agreements with key employees. If the transaction is structured as an asset sale, the buyer will almost certainly have to enter into new contracts to replace existing ones if those existing ones are not assignable. This includes leases – for any equipment and for the premises used by the business.
Legal considerations also extend to regulatory compliance. Depending on the nature of the business and the industries involved, the acquisition may be subject to various regulatory requirements at the federal, state/provincial, and local levels. Regulatory compliance issues can arise in areas such as securities laws, antitrust laws, environmental regulations, taxation, employment laws, and licensing requirements. Failing to comply with applicable regulations can result in fines, penalties, and other legal consequences that may jeopardize the success of the acquisition. If you’re buying a business, the importance of understanding this and acting on it cannot be overstated .
Another critical aspect of buying a business is addressing potential legal liabilities and risks. Buyers must carefully assess the extent of liability they are assuming as part of the acquisition and take steps to mitigate those risks. This could involve obtaining the aforementioned representations and warranties from the seller, obtaining insurance coverage, setting aside funds in escrow for contingent liabilities, or structuring the transaction in a way that limits the buyer’s exposure to potential liabilities.
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Our course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, teaches you how to accurately value and successfully sell businesses.
On top of all this, buyers should consider the implications of intellectual property rights associated with the business. This includes patents, trademarks, copyrights, trade secrets, and other proprietary assets that are critical to the company’s success. Conducting thorough due diligence on the target company’s intellectual property portfolio is essential to ensure that the buyer acquires valid and enforceable rights and does not infringe on the intellectual property rights of others.
Additionally, buyers should be aware of any employment-related legal issues that may arise as a result of the acquisition. This includes understanding the impact of the transaction on existing employees, complying with applicable labor laws, addressing employee benefits and compensation plans, and minimizing the risk of employment-related claims or disputes. Get – and understand – any existing employment agreements.
Finally, it is essential to consider the tax implications of the acquisition. Structuring the transaction in a tax-efficient manner can help minimize tax liabilities and maximize the financial benefits of the acquisition. This may involve consulting with tax advisors and considering various tax strategies such as asset purchase vs. stock purchase, tax-free reorganizations, and tax incentives for specific industries or regions. How the transaction is structured when purchased will impact the buyer’s tax liabilities when the business is subsequently sold, even many years down the road.
The Bottom Line
Buying a business involves a wide range of legal considerations that require careful attention and expertise to navigate successfully. By conducting thorough LEGAL due diligence, negotiating comprehensive purchase agreements, ensuring regulatory compliance, addressing potential liabilities, protecting intellectual property rights, managing employment-related issues, and considering tax implications, buyers can minimize risks and maximize the likelihood of a successful acquisition.
Making sure that experienced legal talent and other professionals are on your team throughout the acquisition process can help buyers identify and address potential legal pitfalls.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at jo*@Wo*******************.com.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at jo*@Wo*******************.com