At Hendershot Cowart P.C., our number one tip for buying a business in Texas is to engage the help of professionals, including a business attorney, certified public accountant (CPA), and valuation expert. Based on our experience with both M&A and business litigation, buyers tend to make a few mistakes in the buying process that lead to issues in the future, including partnership or shareholder disputes, undisclosed risks or liabilities, non-compete violations, and disputes over the payment terms. Before you make one of the biggest investments of your life, review your decisions – and all the documents and agreements – with experienced professionals.
If you are buying an existing business, work with professionals and protect yourself from business risk and deal disputes with these 5 steps:
1. Do Your Preliminary Research
Learn everything you can about the business, including why it is for sale. Read the Google and Glassdoor reviews. Check public records and city or county offices to find out about the company’s history, previous owners, licenses, and permits. Make sure the business meets the legal requirements of the city, county, and state it is located within – and double-check its local reputation.
Most importantly, find out why the business is for sale. Have the owners attempted to sell before? A situation in which the previous owner is retiring is very different from a business that is facing regulatory scrutiny, dwindling profit margins, or bankruptcy.
Doing your research before buying will give you negotiating power, make you a more attractive buyer, and save you from wasting time and money conducting due diligence on a questionable purchase.
Call (713) 909-7323 or contact us online to discuss your business acquisition. Our business law attorneys will dive into the details of the transaction and help you close the deal.
2. Conduct Due Diligence
Once you meet with the seller, your inspection period begins. This is your opportunity, under the guidance of an attorney, to exercise due diligence and investigate the business. You can physically evaluate the premises, furniture, fixtures, equipment, and inventory, but you and your attorney will also need to take a closer look at the company’s financial situation, as well as liabilities and legal or compliance risks.
Our firm starts the inspection period with a 100-point due diligence checklist and then customizes it to each client’s unique transaction.
While there is no “one-size-fits-all” checklist, here are the broad categories we cover when performing due diligence on behalf of our clients:
- Legal and ownership matters, such as the articles of incorporation or certificate of formation, operating agreements, and organizational charts
- Financial matters, including audited financial statements, written budgets, accounts payable and receivable, debt schedule (as applicable), and more
- Tax information
- Bank and credit arrangements
- Government and regulatory issues
- Real and personal property, including leases
- Intellectual property (trade secrets, trademarks, patents, copyrights) and the methods the company uses to protect that intellectual property
- Business matters, such as key suppliers, client lists, a list and copies of all material contracts or agreements in place, and more
- Compliance policies and any investigations or audits by enforcement agencies
- Employees, compensation, and benefits
- Insurance coverage and claims history
- Pending, resolved, or threatened litigation or legal actions
- Plus, any miscellaneous information the officers of the company deem material
These days, the requested due diligence documents are uploaded to a virtual data room. Your attorney and advisors will need access to that data room as soon as possible so they can:
- make sure the necessary information for the due diligence is provided;
- ensure the disclosure schedules are complete;
- evaluate the transaction; and
- ensure that the closing documents provide the client the necessary protections for the transaction.
A Note About Nondisclosure Agreements
The business you are buying will not want to turn over company information and trade secrets without protections in case the deal falls through. As such, the seller may ask you to sign a nondisclosure agreement (NDA) or confidentiality agreement. Disclosing confidential information is an integral part of buying a business, so it is in everyone’s best interests to agree to a detailed NDA.
Whether or not the deal works out, the NDA will protect both parties from litigation, so long as it is clear and enforceable. An experienced business lawyer can draft an NDA that works for everyone involved.
3. Get Your Finances in Order
You can purchase your new business in cash or finance your purchase through banks, credit unions, small business associations, equity, or investor funds.
No matter how you decide to pay, get pre-approved or make sure you are ready to make the financial commitment. Being pre-approved can make you a more attractive buyer. If you know how much money you are willing and able to spend, you will also be better prepared for any negotiations that arise.
While you are thinking about your financial future, consider limiting your liability by creating a business entity. Speak to your attorney to find out whether a sole proprietorship, business partnership, limited liability company (LLC), corporation or another option is right for you.
4. Sign a Letter of Intent
Once you are serious about your purchase, sign a letter of intent. This non-binding agreement is the beginning of negotiations and can include essential terms and conditions of the sale. It also outlines both parties’ obligations.
You won’t be penalized for walking away from a letter of intent, but it can make the purchasing – and transferring – of a business that much smoother.
5. Make a Transfer Plan and Purchase Agreement
The purchase and sale agreement is the most important part of buying a business. This document will contain details about entities and business types and outline what, exactly, you are purchasing. All business assets will need to be listed on the agreement; as well as any exceptions, warranties or liabilities (supported by a thorough disclosure schedule).
The purchase agreement will also stipulate the final price of the sale and payment terms. If buyers and sellers have different opinions about the value and future potential of a business, they may compromise by including an earn-out provision in the purchase agreement. While intended to avoid disputes, earn-outs can lead to problems or disputes if they do not detail the metrics, methodology and time periods used for the earn-out formula.
Watch out for these four reasons earn-outs can go wrong (and how to protect yourself).
Make sure you get an itemized list of all sale contents before you purchase your new business. This itemized list may include fixtures, inventory, trademarks, and patents and should appear on your purchase and sale agreement.
Finally, the last thing you want after purchasing a business is an interruption in services or operations. For this reason, you will also want to develop a transfer plan, so the business, its employees, and its operations can continue working through the change of ownership. Often, the previous owner can help you with the transition process, and many former owners agree to stay involved in business operations for a set amount of time as part of the sale.
P.S. Don’t Forget a Non-Compete Agreement to Protect Your Investment
If you and the seller do not sign a non-compete agreement, there is nothing stopping them from opening a competing business right next door – especially if you did not purchase any of their intellectual property.
Protect your investment by signing a non-compete agreement that lasts long enough for you to get on your feet as a business owner and make the business your own.
Special Considerations for Health Care Enterprises
Investing in a healthcare enterprise or medical practice comes with its own set of risks and considerations. Before you purchase a healthcare entity, make sure you choose an attorney or law firm with experience in both business law and health law.
Our attorneys at Hendershot Cowart P.C. can help you acquire a new practice or other purchase by performing due diligence, drafting agreements, and making sure all companies involved in transactions are 100% compliant with state and federal health care laws.
We can also prepare change of ownership documents (CHOWs) required by the Texas Department of Aging and Disability Services and the 855 Applications needed in order to provide Medicare and Medicaid Services.
Our services do not end at the point of sale, either, as we can handle all healthcare regulatory compliance issues, including drafting compliance plans, helping you establish patient confidentiality policies and procedures, and guiding you through Medicare provider enrollment.
Leveraging over 100 years of collective experience in business and health care law, the attorneys at Hendershot Cowart P.C. take a methodical, comprehensive approach to address regulatory, contractual, and financial issues inherent to mergers and acquisitions – to help you avoid exposures and disputes before, during, and after a transaction.