RULES OF BUYING A BUSINESS: RULE NO. 3: WRITE A CAREFUL OFFER
Once you have decided to move forward with buying a business you should write a careful offer. First, I recommend you consult a lawyer to assist you in writing the offer. The cost is often not as much as people might imagine and it could help you from making a major mistake. For example, do you want an asset or stock purchase? There is a big difference in the legal and tax consequences between the two types. Second, you will want to draft the offer with certain contingencies in mind. A nonexhaustive list of such contingencies may include:
1) Due diligence including, but not limited to, financial review, taxes (income, sales and employment), corporate structure review, inventory issues, asset lists, lawsuits, real estate or lease issues, contracts review, employment matters, etc.;
3) Necessary approvals from governing or regulatory bodies;
4) Environmental issues (if applicable);
5) Obtaining agreements on non-competes for owners and key employees;
6) Representations and warranties;
7) Continuation of the normal operation of the business with no material changes;
8) Penalty provisions in case the owner sell or negotiates with another person after accepting the offer;
9) Other issues specifically related to the situation.
I also highly recommend contacting an accountant before making an offer. It is important to gain enough financial information up front in order to make a reasonable offer based upon your own financial situation. Keep in mind that if you have a loan or other debt you may need a significant cushion to make the payments and support yourself too. DO NOT BUY ON EMOTION – SEE RULE NO. 1. Unless you are a financial expert you should have the accountant review the financials in order to help you understand how much you can reasonably pay for the business.