Five Steps to Buying a Small Business in New York – Part 1

See Part 1 here; Part 2 here; Part 3 here; Part 4 here; Part 5 here;

This is the first in a series of five posts working through the process of buying a small business in New York.

This series will focus on the legal aspects of such a transaction and an attorney’s contribution to a successful business purchase.

Let’s start with an overview of the usual sequence of events when buying a business. Obviously, the first step is to find a business worth buying.

1.    Step One: Finding a Business

You can find businesses to buy in many places: on the internet,
through business brokers, or through your own networking efforts.
Lawyers are usually not involved in this process unless they act as a
broker or they happen to know someone who wants to sell a business.
While it can be easy to find a business for sale, it is not so easy to
find out whether the business is a worthwhile acquisition and just the
right business for you.

Once you have identified a potential target, you will start a period
of investigation of the business to determine the worthiness of the
business and the appropriate terms of the purchase. Investigation of
the business (known as “due diligence”) and negotiation of the terms of
the business are intertwined, so the next two steps do not occur
strictly one after the other.

2.    Step Two: Negotiating the Terms of the Deal

After you have done some investigating, you will start to negotiate
the terms of the purchase with the current owner(s) of the business.
The initial negotiations will focus on the basic terms of the purchase,
for example:

•    the purchase price;
•    whether that purchase price will be paid in a lump sum or in installments;
•    if installments are negotiated, the amount of the down payment and the interest rate;
•    the structure of the purchase, i.e., are you buying the assets of the business or the whole entity;

The terms you initially agree on with the seller are often
documented in a “term sheet” (also known as a “letter of intent” or a
“memorandum of understanding”). The term sheet is rarely longer than a
page or two, and should expressly state that it is non-binding on both
parties. In other words, the terms could later change without either
party being in breach of any agreement, and you and the seller could
even walk away from the transaction altogether. Nonetheless, term
sheets have some weight in the further negotiation of the transaction.
It will be somewhat harder to convince the seller to deviate from
points already set forth in a term sheet.

An attorney may or may not be involved in the drafting of the term
sheet. More experienced business people usually hash this out for
themselves and bring in their attorneys after the term sheet has been
prepared.

3.    Step Three: Due Diligence

Due diligence is the process of investigating the business inside
and out. You want to know that the price you are paying for the
business is fair, and that there are no hidden secrets about the
business that could haunt you after you become its owner. You also need
to make sure that the transfer of the business does not interfere with
any third party’s contractual rights or that it is made impossible by
another agreement. For example, if you buy a business that leases its
business space, and you would like to buy the lease as well, you had
better make sure that the lease allows for a transfer to the buyer of
the business.

4.    Step Four: Documenting the Deal

An attorney will draft and/or review a number of agreements and
documents that are instrumental in the transfer of the business to you.

The most important document in a business sale is the “purchase
agreement” (also known as the “sales agreement” or “acquisition
agreement”).  Often, the seller’s attorney will prepare the first draft
of this document. Unfortunately, that doesn’t always mean that your
attorney has less work to do. If the seller’s attorney is inexperienced
or just plain unreasonable, the review of a bad or one-sided agreement
might take more time than preparing it in the first place. The draft
and review of the sales agreement may also involve a fair amount of
negotiating over the specific terms of such an agreement.

The attorneys will also prepare a “closing checklist,” which is  a
list of all of the documents and agreements that need to be drafted and
executed, and of all actions that need to occur on or before the
closing of the sale.

5.    Step Five: The Closing

The closing consummates the transaction. The parties and their
attorneys get together to exchange money and property and take care of
all remaining paperwork. Some closings are uneventful. Others can
include last-minute negotiation of agreement terms, waivers of
representations, temper tantrums, and so forth.

6.    Your Attorney’s Role

A good attorney in a business acquisition acts as a project manager, intermediary, and –last, but not least – a legal expert.

As a project manager, he or she oversees the deal, orchestrates and
manages the players, moves the transaction along, and brings it to a
successful close.

As an intermediary, he or she keeps conflicts away from the
buyer-seller relationship by negotiating directly with the seller’s
attorney.

As a legal expert, he or she drafts or reviews the necessary legal
documents, knows about the relevant legal aspects of your business
purchase, advises you on the legal consequences of changing facts and
circumstances, and devises strategies to circumvent legal roadblocks.
_____________________________________

Stay tuned for Part 2:  “Negotiating The Terms of the Deal”

See Part 1 here; Part 2 here; Part 3 here; Part 4 here; Part 5 here;

If you need help with buying or selling a small business in New York, contact a licensed small business attorney in your area.

About Imke Ratschko


Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027.

14 comments

  1. Well the most important thing you should do is to checked all the document like The most important document in a business sale is the “purchase agreement” (also known as the “sales agreement” or “acquisition agreement”). Often, the seller’s attorney will prepare the first draft of this document.

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  5. would you advise hiring a lawyer to make sure the t’s are crossed, i’s are dotted etc?

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  10. would you advise hiring a lawyer to make sure the t’s are crossed, i’s are dotted etc?

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  14. The terms you initially agree on with the seller are often documented in a term sheet

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