This article are provided for information purposes only, and are not intended as legal advice.


Common misconceptions about buying a business

November 6th, 2009
The biggest misconception is that many investors have is that you will be able to buy a business within a week. Many investors, if this is their first business which they are about to buy, take up to 12 months to find a business to buy. Why does it take so long? Many investors do not know what they are looking for so they spend months looking at many opportunities.
 
 
Once they finally find the business that they would like after a few months they will put in a letter of intent. If they use a lawyer that could take two weeks to document, then due diligence could take 2 to 3 weeks. I know of a business currently for sale, the buyer and seller of the business are competitors.  They spend months negotiating on what information would be provided so that the buyer of the business could come up with a purchase price.  This sale of the business will take probably 12 months or longer to be able to close.  That is how long the negotiations are expected to last! 
 
 
On smaller transactions, once the due diligence is completed then the layers must create the purchase and sale agreement.  This could take another 2 to 3 weeks for a small business and months for a more complicated larger transaction. Even if you find the perfect business tomorrow it will take 2 to 3 months to close at the earliest.  The more people that are involved in the purchase and sale agreement including accountants, lawyers etc, the longer it will take to close the deal.  In the transaction which I referred to above where the negotiations will take 12 months, the buyer has 31 full time people working on the transaction. To date, they have been negotiating for 6 months and they have not determined the purchase price or started due diligence.  This is a sale taking place in Europe and many legal issues had to be resolved including the country of sale.  An American company is buying a European company through their Dutch subsidiary but the Italian company which is for sale,  is owned by a Swiss holding company.  What language should the agreement be in, if translated into english, which document would take legal precedent, what country was the sale to take place, Netherlands, Switzerland or Italy? What currency was being used, the euro or the Swiss Franc or US dollars since this is being approved by the US parent company?  These are all part of the negotiations.

 

Many investors believe that they can find a business and purchase it without using any professional advisers. Some use lawyers only and do not get their accountant to provide than any advise. This can be risky because accountants and lawyers can both provide different types of advise that will be beneficial if problems arise in the future.

 

Some sellers believe that they can cap their legal fees. Legal fees are based on time used to complete the documents. The purchaser’s lawyer generates the initial documents. If they provide your lawyer a 90 page document when a 25 page document would suffice, legal fees will increase substantially. If the two lawyers do not agree on terms, that will increase fees.  Many years ago, I was aware of a business which was sold.  The legal fees should have been $20,000 to $30,000 for both sides.  The purchaser’s lawyer charged $75,000 and the vendors lawyer charged $25,000.  In my opinion, the lawyer created too many documents which ultimately were thrown out by their own client who eventually realized that the law firm was trying to create fees because he came from a very wealthy family.  Unfortunately, the vendor’s lawyer had to deal with the excessive paperwork and that cost him far more in legal fees than should have been incurred.

 

Many buyers of businesses do not remember to include legal and accounting fees in their budget of cash needed to close a sale.

 

These are just some of the misconceptions that buyers and sellers of businesses have.


Filed under: Buying a business — Gary Landa @ 10:24 am


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