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


Do you need lawyers and accountants when you buy a business?

October 1st, 2008

Unless you have the expertise yourself, it is prudent to use outside help when buying a business.  If you buy the shares of a business and you are become liable for liabilities which you were not aware of – if you did not deal with that in the purchase and sale agreement, you may not have any recourse against the old owner.  Don’t forget, the legal agreement defines what you purchased and who is responsible for different items i.e. tax arrears etc.  Legal agreements are there for when things go wrong but most importantly they define what you purchased, the purchase price at the description of the assets you purchased.  The lawyer often do searches on the company and assets to determine if there are any liens on the assets which must be discharged prior to closing. 

 

The lawyer often creates a non competition clause as well.  If you do it, you may not be aware of the current laws that exist and your agreement may not work the way you think that is should.  For example, I saw a non competition agreement that said that the old owner could not compete within a 50 mile diameter of the business.  The purchaser meant to say 50 miles in any direction.  A 50 mile diameter is only 25 miles from the existing business. Once the deal closed, it was impossible to amend the agreement and the old owner started a new business 26 miles away and stole many of the old clients.

 

When buying a business, you should conduct due diligence of the accounting records.  You can then determine if the information provided to you was correct.  If you do not have an accounting background, you may miss important items in your due diligence that may be very important in your decision to purchase the business.  As an accountant, I have seen many problems.  For example, I did a due diligence of a restaurant in an office complex for a buyer.  The restaurant was open 5 days per week but the accounting records showed that they had 6 days of revenue.  There were other signs as well which showed that the sales and profit of the restaurant were materially overstated.  The purchaser backed out and did not buy the business.  Someone else did purchase the business and the new purchaser did not discover the overstatement of revenue and profits in due diligence period.  After they closed the purchase and sales agreement, they suffered significant losses as soon as they began to operate the business. 

 

In summary, the use of accountants and lawyers may seem expensive when purchasing a business however if there is a problem, in the long run, they will have saved you a considerable amount of aggravation and expense.


Filed under: valuation of a business — Gary Landa @ 8:37 am


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