Buying a Business: Common Dangers and Pitfalls

Anyone who wants to buy a business needs to be cautious before signing an offer. It is critical to consult with a lawyer who is experienced in California business sales to guide you through the process. Very often the business purchase agreements presented by brokers to potential buyers are designed to protect the broker and not the parties to the agreement. By contrast, the California Association of Business Brokers has an excellent standard form that is a good starting point for negotiations.

Structuring the Transaction. First you need to decide the structure of the agreement. Structuring the transaction is not an issue that should be determined by a business broker. You should consult with your tax advisor and attorney to determine how you are going to hold the company. Will you operate the business as an S-Corporation, a C-Corporation, a limited liability company or some other form? Are you buying an existing company or only the assets of the business? Each transaction is different and must be separately evaluated.

Investigations. It is surprising how many “standard” agreements say that the buyer has already inspected the agreement when, in fact, they have not. Due diligence is the key to a successful business purchase. Buyers should make the purchase contingent upon their careful and satisfactory investigation of each aspect of the business. You need to determine whether the Seller is the actual owner of the assets and business and make sure no one else has a lien or title to the business or its assets. At a minimum you will want to perform a UCC search. You need to investigate whether the business is properly licensed and whether those licenses can be transferred. Has the business ever been cited or closed by a government agency or sued? Are the assets in good working condition? Are there any warranties for any of the business’ equipment? Are there any problems with the structure in which the business is situated such as mold, termites, or non-compliance with government regulations such as the ADA. Most critically, you need to investigate the accuracy of the company’s book and records.

What are you getting? A business sales agreement should explicitly list exactly what is being transferred to the buyer. This includes all service agreements, leases, inventory, equipment, intellectual property (such as domain names, patents, trade names, service marks, trade secrets, trademarks, business plans, and client lists), accounts receivables and licenses. Information regarding trademarks and service marks can be found on the California Secretary of State’s Web Site. Similarly, if you are acquiring the business as a going concern the liabilities must be clearly disclosed. Liabilities go beyond simply accounts payable, you need to make sure there are no pending lawsuits or problems with hazardous materials that may arise after you buy the business. What are the terms of the existing employment agreements, leases and other agreements to which the business is bound?

Logistics. A good business purchase agreement will set forth the actual logistics of how the transfer will proceed. How will utilities be transferred? Will new bank accounts be created? How will credit card transactions be divided and transferred? What items will be pro rated? Will there be an escrow? Will you take over the Seller’s State Board of Equalization Account? Will the landlord approve of the lease transfer? Will the Seller be liable for issues that arose prior to transfer?

These are only a few the issues that need to be addressed when buying a business. At Adina T. Stern, a Professional Law Corporation, we have nearly thirty years of experience assisting clients who are buying or selling their businesses. We assist clients throughout California including, Beverly Hills, Foothill Ranch, Irvine, Los Angeles, Malibu, Mission Viejo, Riverside, Palm Desert, Palm Springs, San Bernardino, San Diego, and Westwood.