Doug Bend is the founder of Bend Law Group, a law firm focused on advising small businesses and startups.
Buying a business is similar to buying a home. If done correctly, it can have a daily positive impact on your life and increase your net worth. But just as you wouldn’t purchase a lemon for a home, if you purchase the wrong business, it can be a damaging drain on your financial and emotional resources.
I have helped with the purchase and sale of dozens of businesses, and I find that the same pitfalls come up over and over again. By knowing what they are and avoiding them, you’ll be happy with your business purchase not only on the day you take the keys but for many years to come.
1. Have a narrowly defined non-compete provision.
The last thing you want is to provide the jet fuel for the seller to open a competing business next door. To protect yourself, you should include a non-compete provision that prohibits the seller from participating in a competing business.
The provision should narrowly define the type of similar businesses the seller is prohibited from not only owning but also working in. In addition, the provision should include a set amount of time that the seller is prohibited from operating a similar business within a specific geographic scope. For example, if you are buying a restaurant, you would specify that the seller cannot invest or work in the restaurant industry for five years within 30 miles of the restaurant you are purchasing.
2. Run a lien search.
A lien is an interest or a legal right that a creditor has on another person’s property. It’s important to make sure that there are no liens attached to the assets you are purchasing. By running a lien search, you can ensure that the assets are not encumbered by a lien, and you’ll know that a third party does not have any interest in the assets you are purchasing.
Have the escrow agent for the business purchase run the lien search, or if you are not using an escrow agent, hire a filing company to do so.
Investing a few hundred dollars in a lien search can pay enormous dividends as it ensures that any problems the seller has with creditors don’t become your problems with creditors.
3. Research the company’s financial history.
Have a CPA “kick the financial tires” of the business to make sure the purchase price is supported by the company’s revenue and expenses. A solid CPA can not only help you determine whether the asking price for the business is fair but will look under the financial hood of the business to see if the numbers the seller is providing you are actually accurate.
4. Carefully review the commercial lease.
Often, one of the biggest assets of a business is its commercial lease. It is worthwhile to hire an attorney who specializes in commercial leases to highlight the key terms and negotiate fixes for any “gotcha!” clauses. Often sprinkled throughout a commercial lease are additional expenses you should be aware of to determine the true rental price of the property and not just the sticker price.
