The Legal Steps to Buying a Business
by NicoleD, Former Moderator
- Created: August 26, 2010, 10:52 am
There are important legal considerations to keep in mind when buying a business. Read this guide to understand what you can expect, and what to look out for when you're in the market to purchase an existing business.
- Thoroughly research the business and look for legal red flags. Learn as much as you can about how the business's operations from the current owner, including details about existing contracts, insurance policies, licenses, employee agreements, and commercial leases. Leases in particular can be a tricky issue for new buyers - you may need to have the landlord's permission to legally transfer a lease - and you could be held to contractual commitments over employee compensation and benefits. Read more about employment and labor laws.
Sellers often require prospective buyers to sign confidentiality agreements. A confidentiality agreement confirms that you will only use the business information to make a decision to buy. Don't be alarmed if you are required to sign one - confidentiality agreements are considered standard procedure.
- Get the full financial story. As a prospective buyer, you'll need to look for potential legal issues with the business's finances. Some states will hold you responsible if the previous owner was delinquent on paying their sales tax. Ensure that you have access to detailed tax and financial statements from the past few years. Shoddy financial documentation and any liens on business assets are warning signs that something amiss. As a general precaution, forming a corporation or an LLC to buy a business will minimize your personal risk for the business's past obligations. To learn more about personal liability and business structures, see the business entity guide on Business.gov.
- Have a clear understanding of what is going to be sold - either the entire business (the entity), or assets of the business. If you are buying the entire business, check to see if required documentation is current and taxes have been paid. Whether you are buying the entire or business or just assets, ensure that key contracts or licenses are either transferable, or you easily acquired on your own. It's also important to understand that business names and intellectual property may not be 'for sale.' Get permits and licenses.
- Negotiate purchase terms. Even if a seller provides you with an estimated value of the business, it's a good idea to hire an impartial appraiser who will determine a fair purchase price. Have a small business lawyer work with you and the seller to draft the terms of the sale and the agreed payment plan (installments, down payment, etc).
- Sign the sales agreement. Once you've agreed to buy the business and have determined the terms of the sale, you will make it legal with a sales, or purchase, agreement. Carefully review the document, which outlines the terms you have agreed to. If you don't have a lawyer help you draft the terms of the sale, you should at least have one review the agreement before you sign it.
- Go through a closing checklist. The closing completes your purchase, so be sure to care of all remaining paperwork. SBA.gov provides a list of key terms to review before your closing.
- SCORE provides more tips on what to look for when buying a business.
- Read this FTC guide for detailed information on buying a franchise.
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Legal terms and rules explained