Start Your Own Business by Inc The Staff of Entrepreneur Media Read Free Book Online Page B
Authors: Inc The Staff of Entrepreneur Media
with city hall and check with the department of public records).
• Ask the business’s attorneys for a legal history of the company, and read all old and new contracts.
• Review related pending state and federal legislation, local zoning regulations and patent histories.
Legal liabilities in business take many forms and may be hidden so deeply that even the seller honestly doesn’t know they exist. How do you protect yourself? First, have your lawyer add a “hold harmless and indemnify” clause to the contract. This assures you’re protected from the consequences of the seller’s previous actions as owner.
WARNING
Make sure you’re in love with the profit, not the product. Many people get emotional about buying a business, which clouds their judgment. It’s important to be objective.
Second, make sure your deal allows you to take over the seller’s existing insurance policies on an interim basis. This gives you time to review your insurance needs at greater leisure while still making sure you have basic coverage from the minute you take over. The cost of having a lawyer evaluate a business depends on your relationship with the lawyer, the complexity of the business and the stage at which the lawyer gets involved. Generally, costs range from $3,000 to as much as $35,000 for a comprehensive appraisal.
If you’re considering buying a business that has valuable intellectual property, such as a patent, trade secret or brand name, you may want an intellectual property attorney to evaluate it. Generally, this will cost from 0.5 percent to 3 percent of the business’s total selling cost.
The Art of the Deal
If your financial and legal assessments show that the business is a good buy, don’t be the first person to bring up the subject of price. Let the seller name the figure first, and then proceed from there.
Deciding on a price, however, is just the first step in negotiating the sale. More important is how the deal is structured. David H. Troob, founder of D. H. Troob & Co., a New York brokerage and investment firm, suggests you should be ready to pay 20 to 50 percent of the price in cash and finance the remaining amount.
You can finance through a traditional lender, or sellers may agree to “hold a note,” which means they accept payments over a period of time, just as a lender would. Many sellers like this method because it assures them of future income. Other sellers may agree to different terms—for example, accepting benefits such as a company car for a period of time after the deal is completed. These methods can cut down the amount of upfront cash you need; however, you should always have an attorney review any arrangements for legality and liability issues. (For more ideas on financing your purchase, see “Let’s Make a Deal” on page 47.)
An individual purchasing a business has two options for structuring the deal (assuming the transaction is not a merger). The first is asset acquisition, in which you purchase only those assets you want. On the plus side, asset acquisition protects you from unwanted legal liabilities since instead of buying the corporation (and all its legal risks), you are buying only its assets.
On the downside, an asset acquisition can be very expensive. The asset-by-asset purchasing process is complicated and also opens the possibility that the seller may raise the price of desirable assets to offset losses from undesirable ones.
The other option is stock acquisition, in which you purchase stock. Among other things, this means you must be willing to purchase all the business’s assets—and assume all its liabilities.
The final purchase contract should be structured with the help of your acquisition team to reflect very precisely your understanding and intentions regarding the purchase from a financial, tax and legal stand-point. The contract must be all-inclusive and should allow you to rescind the deal if you find at any time that the owner
• Ask the business’s attorneys for a legal history of the company, and read all old and new contracts.
• Review related pending state and federal legislation, local zoning regulations and patent histories.
Legal liabilities in business take many forms and may be hidden so deeply that even the seller honestly doesn’t know they exist. How do you protect yourself? First, have your lawyer add a “hold harmless and indemnify” clause to the contract. This assures you’re protected from the consequences of the seller’s previous actions as owner.
WARNING
Make sure you’re in love with the profit, not the product. Many people get emotional about buying a business, which clouds their judgment. It’s important to be objective.
Second, make sure your deal allows you to take over the seller’s existing insurance policies on an interim basis. This gives you time to review your insurance needs at greater leisure while still making sure you have basic coverage from the minute you take over. The cost of having a lawyer evaluate a business depends on your relationship with the lawyer, the complexity of the business and the stage at which the lawyer gets involved. Generally, costs range from $3,000 to as much as $35,000 for a comprehensive appraisal.
If you’re considering buying a business that has valuable intellectual property, such as a patent, trade secret or brand name, you may want an intellectual property attorney to evaluate it. Generally, this will cost from 0.5 percent to 3 percent of the business’s total selling cost.
The Art of the Deal
If your financial and legal assessments show that the business is a good buy, don’t be the first person to bring up the subject of price. Let the seller name the figure first, and then proceed from there.
Deciding on a price, however, is just the first step in negotiating the sale. More important is how the deal is structured. David H. Troob, founder of D. H. Troob & Co., a New York brokerage and investment firm, suggests you should be ready to pay 20 to 50 percent of the price in cash and finance the remaining amount.
You can finance through a traditional lender, or sellers may agree to “hold a note,” which means they accept payments over a period of time, just as a lender would. Many sellers like this method because it assures them of future income. Other sellers may agree to different terms—for example, accepting benefits such as a company car for a period of time after the deal is completed. These methods can cut down the amount of upfront cash you need; however, you should always have an attorney review any arrangements for legality and liability issues. (For more ideas on financing your purchase, see “Let’s Make a Deal” on page 47.)
An individual purchasing a business has two options for structuring the deal (assuming the transaction is not a merger). The first is asset acquisition, in which you purchase only those assets you want. On the plus side, asset acquisition protects you from unwanted legal liabilities since instead of buying the corporation (and all its legal risks), you are buying only its assets.
On the downside, an asset acquisition can be very expensive. The asset-by-asset purchasing process is complicated and also opens the possibility that the seller may raise the price of desirable assets to offset losses from undesirable ones.
The other option is stock acquisition, in which you purchase stock. Among other things, this means you must be willing to purchase all the business’s assets—and assume all its liabilities.
The final purchase contract should be structured with the help of your acquisition team to reflect very precisely your understanding and intentions regarding the purchase from a financial, tax and legal stand-point. The contract must be all-inclusive and should allow you to rescind the deal if you find at any time that the owner
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