Buying someone else’s business is always a challenging process. You have to consider every aspect of the targeted business and think through potential issues that may occur along the way.
The ideal situation is to buy an expanding business that the current owner is not able to scale properly, but this is not the most common case. On the contrary, the reasons are usually different and force you to reconsider the purchasing decision many times. After all, why would anyone sell a profitable business?
If this question bothers you, here are some things you should pay attention to:
- The company is facing very strong competitors
- The business plan is malfunctioning
- No market demand for their products or services
- The debts are too high
- The company is not properly located
- Branding issues
- Old and obsolete equipment or production technology
If you are not worried about any of these problems, then you should think about the liability issues when you buy a business. Our job is to help you with that.
8 Owner Liability Issues When You Buy a Business
Write a Letter of Intent
A letter of intent – also known as a term sheet – is the first thing you should negotiate with the seller. While the document itself is informal, it will help you to list all of the major details of the sale. Some of the main details a letter of intent should cover include the price you pay to buy the business, the list of assets, and non-compete terms. A letter of intent doesn’t have a binding power, but it is the foundation for creating the final contract between the buyer and the seller.
Buy the Assets and Not the Business
Another thing you should bear in mind is not to purchase the company’s stocks, but rather its assets. Do it by launching a brand new company and completing the entire transaction through this legal entity. Why is it so important?
If you buy assets, you don’t inherit the previous owner’s debts. In such circumstances, no one can sue you and your company for old financial obligations. At the same time, the tax basis will be fixed to the amount you paid for the assets.
Talk with the Employees
This is a major issue in the process of purchasing a business. Namely, you don’t want to buy a company just to see the best of its employees leaving the organisation immediately. Workers represent the core of every business and you will need them to keep the operations running smoothly in the transition process.
This is exactly why we recommend you to arrange a meeting and talk with team members to hear more about their plans. If some of them are afraid of changes, you should convince them that you have big plans for the company and encourage them to keep working. It’s a win-win situation for both parties.
Discuss the Seller’s Lease
When you buy a business, you probably don’t want to relocate it immediately. If this is the case, then you should discuss the seller’s lease and see how to make use of it appropriately. There are two things to consider here:
- How much lease time is left?
- Can you extend the lease on the same terms and conditions?
As soon as you find it out, we advise you to negotiate a long-term lease with the landlord.
Obtain an Indemnity from the Seller
Even the most agile investors cannot be sure that their checks and analyses will be 100% accurate. For this reason, you should try to obtain an indemnity from the seller to make sure that possible lawsuits are going to target the previous owner. It’s the only way to remain fully protected against unexpected financial burdens.
Of course, the seller has the right to ask the same thing from you. In case you get sued for your own actions, the seller should count on an indemnity as well.
Form an LLC
Now that you’ve negotiated everything with the seller, it is time to focus on yourself and find a way to eliminate any other liability issues. First of all, you should organise a new business in the form of a limited liability company (LLC). Just like the name suggests, an LLC allows owners and executives to protect themselves from personal liability in the vast majority of situations.
Don’t Mix Personal and Business Assets
The only way to eliminate the risk of personal liability is to distinguish between business and private accounts. Although it may be boring or even complicated sometimes, mixing the two types of assets can get you into a lot of trouble. Therefore, you should do everything using a business account and assets, thus leaving all the liabilities to the legal entity.
Hire a Legal Advisor
With everything we mentioned so far, you can have more clarity around buying a business. However, it doesn’t mean you can enter the process single-handedly and do all the work alone. Instead, you should hire a legal advisor to help you out and assist you in creating an impenetrable contract with the seller. After all, legal consultants are niche experts who know all the tricks, so make sure to hire one and seal the deal without the fear of getting sued in the future.
If you need legal advice for your business, book a call with our legal team and we’ll guide you through every stage of your legal needs.