So You Want to Buy a Business (First Build Your Support Team!)
The time has come that you are tired of the corporate nine to five or perhaps your inner entrepreneur is crying out to start your own business where you can offer great service in your chosen area of expertise. Regardless of your reasoning, at Marti Law Group we celebrate the entrepreneurial spirit. We have represented clients in various industries from home services to specialty dental and medical practices. As you might have guessed, we feel strongly that you don’t go it alone! With so many financial and legal hurdles, it is imperative that you find the proper support system as you venture out in search of your new endeavor. In this blog, we will explore some of the critical team members you should surround yourself with before making an acquisition.
A Strong Financial Advisor or CPA
One of our first questions when receiving an inquiry from a client about purchasing a business is to ask: who is your financial partner or CPA (we use these terms interchangeably). While we know a thing or two about business and legal issues, we don’t dare claim to be financial specialists, thus we want to have a preliminary discussion with whomever is helping you vet the numbers of prospective acquisition targets. A strong CPA (Certified Public Accountant) or financial advisor should be able to help you: (i) value the business and establish a fair purchase price, (ii) identify discrepancies in historical data within the target and (iii) create a pro forma to give you an idea of where you might plan to be in one year, three years, or longer after purchasing the company. Of course, no one has a crystal ball and thus can’t predict changes to the industry or overall economy, however a financial partner should be able to help you forecast conservative numbers (if things don’t trend up as quickly as you might hope) as well as a more aggressive projection (should you be able to rapidly increase the trajectory of the company). The pro forma will also be necessary if you intend to finance some or all of your purchase, as lenders need data to decide if they are comfortable with the respective level of risk. Though you can certainly create projections yourself, it helps lender confidence to show that an experienced financial expert helped ensure accuracy throughout the process.
An Experienced Real Estate Expert
Perhaps your target business is a well-established brick and mortar location that you don’t plan to relocate. In that scenario, the need for real estate support may not be as critical to you during the process. However, part of your diligence should be considering whether this business is ideally situated at its physical location (if it has one). Do the demographics around it support the anticipated growth you’d like to see? Would the population better support your ability to scale in a new or larger space? Alternatively, maybe the business is operating in a A-rated plaza and doesn’t need to be (think Whole Foods or another premium anchor tenant) or the former owner loved the view of downtown, but paid a hefty price for such. You might be able to come in and make an immediate cost cut in lease fees by finding a more appropriate setting out of which to operate. Again, this does not apply to every organization. A retail business needs its storefront. In addition, the last thing you want to do is make a major change that could disrupt operations. Nonetheless, it is important to work with a trusted real estate advisor if you are considering relocating. A commercial broker will know the market demographics and can help you identify geographic opportunities that may not be listed online for sale or lease. This will be of particular importance for someone buying into a franchise model. Some franchises will have their own internal real estate team while others will leave it to you to find a broker. In either scenario, there is a reason they say, “Location, location, location”…because it matters!
A Trusted Legal Partner
You probably saw this one coming, but it goes without saying that a critical member of your team must be an attorney or law firm that is experienced in this area of practice. While plenty of small businesses are purchased without the help of legal counsel, the risks that a buyer runs in such a scenario far outweigh some legal fees to ensure you are fully protected.
One of our initial steps in the diligence process involves running a “lien and litigation search” on the potential target. As we like to say, the last thing we want is for our client to “buy a lawsuit.” We’ve found on many an occasion that even the most well-intentioned seller has no idea how much outstanding debt she or he may have on the company. You may think that any outstanding monies owed are purely the seller’s problem, however if you purchase their business without very explicit language to protect you from a such debt or outstanding lawsuit liability…think again. “Successor liability” are two words that will keep most M&A attorneys up at night. That is, you – as the successor and new owner of the business – can be held liable for past debts and obligations that you had nothing to do with. This presents itself frequently in the form of back-taxes owed. Many states require a “bulk sales tax” document to be filed so that the government becomes made aware of the transfer of the business and can inform the parties of taxes owed. When representing a buyer, we go a step further and require a portion of the purchase price to be “held back” in escrow pending the results of a bulk sales tax filing. Once the respective state gives a clean bill of health for the business that no past taxes are due, we release the funds to the seller. Rather frequently, we have to use some portion of those withheld proceeds to make a payment.
Another scenario arises when there is a need for “re-work.” In the context of a dental transaction, this may mean that the buyer has to re-do a crown on a patient seen before she or he purchased the practice. We don’t want you to have to foot the entire bill, so we will pre-negotiate how such scenarios are handled. This will again result in a need to access escrowed funds to reimburse the provider for re-treating at no cost to the patient.
While there are far too many legal risks to list in this blog, it should be clear that you must have a trusted legal partner at your side throughout the purchase process. At Marti Law Group, we are hyper-focused in two areas: real estate and business…particularly representing buyers and sellers of companies and healthcare practices. To evaluate whether we are the right legal partner for you, call us at (860) 552-7770 or email email@example.com for a free consult. We look forward to helping you safely and confidentially fulfill your dream of becoming a business owner!