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

See 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"

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