Do I Need a Lawyer to Buy a Business?
You don’t have to be a tech whiz or have a golden idea for a startup to reap the rewards of owning a business.
Buying an existing company has a number of advantages over starting one from scratch. When you buy a successful business, you’re taking complete ownership over an operation with a proven track record of bringing in profits for its previous owners.
But there’s a lot that goes into ensuring you’re getting a great deal – and that the business you want to buy is a solid investment. Negotiations, paperwork, research, drafting legally compliant documents; they all require methodical consideration and a lot of specific expertise.
Faced with these complicated variables, you’re probably wondering: Do I need a lawyer to buy a business, or is it possible to handle the whole buying process myself?
Let’s explore….
The Buying Process: 4 Key Steps
Personally, I’m not over here asking myself, “Do I need a lawyer to buy a business?” I’m 100% sure what my answer is.
But I understand why you might be considering taking the buying process into your own hands. After all, savvy entrepreneurs and investors are always looking for ways to save their capital and avoid unnecessary expenses.
But you also want to avoid getting screwed over by a shady negotiating tactic you didn’t see coming…right?
If you incorporate each of the following steps into the buying process, you’ll have a much greater likelihood of walking away from the negotiating table with an excellent deal and a business that’s sure to provide a terrific ROI.
Here we go….
1. Research
Before asking yourself, “Do I need a lawyer to buy a business,” ask yourself the following question: “How good am I at research?”
And I don’t mean typing a couple of queries into Google and hoping for the best – I mean real, in-depth, find-all-the-facts research.
If you’re hesitating, you should definitely consider hiring an attorney.
Research is one of the things lawyers are trained for. They have to be really, really good at gathering information in order to put together the full picture for their clients.
In terms of buying a business, the research process is indispensable, and it’s crucial to get it right. Research is how you determine whether a business is worth buying.
When you encounter a business you’re interested in acquiring, you need to investigate it thoroughly before you even approach the owner with an offer.
A lawyer can help you uncover and analyze the following details:
- How long the business has been operating, and how successful it’s been
- How diverse the business’s client base is (no single customer should be responsible for more than 20% of profits)
- Whether the business has demonstrated strategic growth and has a long-term plan
And there are a few questions only you can answer, such as:
- Is this an industry I understand and am interested in?
- Do I have a vision for this business’s future?
- Am I invested in this business’s products or services?
Once you’ve completed the research phase, you’re ready to move on to valuing the business – for which you’ll want to hire another type of expert.
2. Work With a Broker
To value a business, you have to look at every aspect of that business in order to determine its worth. If that sounds like a huge amount of work, it is – which is why hiring a business broker is generally a good idea.
Business brokers are accomplished and experienced with valuing companies. No details will slip through the cracks when you work with an expert like that.
And finding an accomplished, top-tier broker is much easier if you have a lawyer on your team. Your attorney can recommend reputable and experienced brokers they’ve worked with before.
Surround yourself with professionals who are experts in their fields, and you’ll dramatically increase your odds of coming out on top.
3. Obtain Financial Records
Your lawyer and business broker can help you obtain the financial records of the business you’re interested in buying. These records are crucial because they offer definitive proof of the company’s growth and profit margins over the years.
Any reputable seller will expect you to ask for these records and will be more than happy to provide them. If the business owner refuses or seems reluctant to let you in on their company’s regular expenses and profits, that’s a huge red flag. Cut your losses and look for a better investment elsewhere.
4. Hire a Top Mergers and Acquisitions Lawyer
“So why do I need a lawyer to buy a business?”
Okay, let’s get into it.
As previously stated, lawyers have impeccable research skills. They’ll ensure no stone is left unturned during the investigation process and provide you with expert analysis of each aspect of the company you want to buy.
Lawyers also have great connections within their fields. If you want to hire a business broker, you won’t have to wade through endless reviews to find a reputable firm; you can just ask your attorney for a recommendation.
Finally, lawyers can look over all relevant documents like leases, contracts, and tax records. They’ll provide you with an expert opinion based on their findings. And if you decide to move forward with the purchase, they can help you draft up an airtight purchase agreement.
6 Questions to Ask During the Buying Process
“I know my way around a negotiation; why do I need a lawyer to buy a business?”
It’s one thing to know how to negotiate in the abstract, but acquiring a business requires thorough information-gathering – and that means knowing which questions to ask during the process.
Your lawyer will help you come up with a list of questions aimed at giving you the fullest possible picture of the business you’re keen on buying – its operational costs, projections, profits, total personnel, and more.
Your attorney will likely come up with more things to ask that are relevant to your specific acquisition, but make sure you don’t leave the negotiating table without getting satisfactory answers to the following six questions.
1. Why do you want to sell?
This should be one of the first questions you ask because it can tell you a lot about the current state of the business.
Of course, there are tons of reasons an entrepreneur might be looking to sell – many of them perfectly innocuous, even positive. Maybe they’ve done a terrific job scaling the business and are excited about moving on to the next opportunity. Or perhaps they’re looking to retire.
However, there are also many less ideal reasons someone might be looking to offload their company, such as declining profits or internal issues.
If the real reason for the sale paints the business in a less-than-ideal light, the seller may not be totally forthcoming. Experienced mergers and acquisitions attorneys can smell this reluctance from a mile away. They’ll get the real truth from the seller, so you’re not left in the dark about any potential red flags.
That’s not to say that a current decline in profits is grounds for dismissing the negotiation entirely. In fact, you can probably leverage that information to get a better deal on the sale. You’ll just need to consider very carefully whether you’ll be able to turn the company around.
2. What does your business’s future look like?
Even if they’ve been planning on selling for a while, the current owner should have a clear image of their business’s near-term projections, as well as general trends in the industry.
Weigh the business’s expected success against your budget. Is it likely that you’ll recoup your purchase costs within two years of buying the company? If not, do you have the funds to withstand losses in the early years?
Of course, you and your lawyer will do your own research into the company and its industry. But it’s always good to get the owner’s perspective – again, your attorney will be able to tell if they’re hiding something.
3. Are there debts outstanding?
Outstanding debts can add considerably to the actual cost of acquiring and operating a business, so it’s absolutely vital not to be blindsided by them.
Obviously, you won’t be responsible for any personal loans or other debts in the previous owner’s name. But if there are debts related to leasing and financing, you’ll be on the hook for them once the sale goes through.
Debts add a long-term cost to the sale price, one that you need to be sure you can afford before going through with a sale.
Many investors aren’t comfortable taking on debt of any kind – a totally understandable stance. If that’s you, all the more reason to uncover any debts associated with the company you’re looking at so you can walk away before you’ve wasted too much time.
4. What about lawsuits?
When you’re in the process of acquiring a business, ongoing lawsuits can really throw a wrench in the works. If you’re still like, “Why do I need a lawyer to buy a business,” consider this: Do you have the legal training and expertise to analyze any investigations or litigation that may be pending against your potential acquisition?
This may be obvious, but a company that’s currently entangled in an ongoing lawsuit is almost never a safe investment. The suit can negatively affect more than the business’s success: depending on the specifics, it could end up damaging your reputation by association.
In most cases, your lawyer will advise you to hold off on the acquisition until the suit has been resolved. You may want to avoid the situation altogether and just look for another company to buy.
5. How much does it cost to run the business?
I’m not saying this is you, but some would-be owners get too excited about their new babies and dive headlong into waters that are deeper than they realize. They say yes to the upfront price without pausing to consider a crucial factor: how much it costs to actually keep the doors open.
I’ll stress this point: once you take control of a company, you’re on the hook for that company’s continued well-being. In most cases, you’ll be solely responsible for keeping the business running. That takes money, and it’s vital that you find out exactly how much before you agree to sign anything.
We already went over the importance of acquiring financial records, so I’m not going to rehash that here. Those records should give you a pretty clear idea of how much it costs to keep the company running – and they’ll also tell you whether its monthly income is enough to cover those costs with profits left over.
6. Does the business’s success depend on any intellectual property that must also be purchased?
This is a question many would-be business owners would never think to ask – and it’s a question your lawyer will make absolutely certain gets answered.
Many businesses depend in part on intellectual property that’s integral to their brand identity and daily operations. Some examples include:
- The company’s name and logo. Many successful businesses are recognizable because they have a memorable logo and name. If you don’t purchase the rights to these and other key branding elements, you’ll risk losing a large portion of your client base as well as the company’s reach and visibility.
- Any confidential information related to daily operations. An example of this might be the recipes for a snack brand’s flagship products. Without those recipes, your offerings won’t taste the way consumers expect, and you’ll likely lose customers as a result.
- The systems and methodologies used within the company. Many businesses have a specific way of doing things that’s important for maintaining workflow and productivity. Any trademarked methodologies used in-house will need to be incorporated into the overall price.
During this phase of the negotiation, the seller may ask you to sign a confidentiality agreement to ensure the business’s “secrets to success” remain under wraps. Doing so is in your best interests, too, but make sure your lawyer looks over the agreement before you sign it.
Your lawyer may advise you to ask the same of the seller. Request a non-compete agreement in addition to a confidentiality agreement. This will prevent the seller from using their inside information about your new business to start a new company that directly competes with yours.
5 Benefits of Working With a Lawyer
If you’re still asking yourself, “Do I need a lawyer to buy a business?” you’re on the money.
By now, you should have a pretty clear idea of why it’s advisable to get a legal team together before entering acquisition negotiations.
But you want a few more concrete pros. It’s an expense, and expenses need justifications.
I’m happy to oblige.
Here are five ways a top mergers and acquisitions lawyer can help make the buying process as smooth and successful as possible.
1. Avoid Unnecessary Risks
Ill-considered risks can sneak up on even the most experienced buyer, but first-time business acquirers are particularly susceptible to jumping into a deal without considering all of the potential downsides first.
A top attorney will analyze every bit of intel gathered about the company and then advise you of any risks they see in taking it over. They’ll let you know which risks are worth taking and which should give you pause.
And if the deal looks too risky to be worth it, they won’t be afraid to let you know.
At the end of the day, the decision of whether or not to go through with the sale is up to you. But having an expert opinion never hurts – especially when it can save you money, time, and a damaged reputation, among other potential consequences.
2. Get the Best Deal
If you’re a novice negotiator, there’s no way you’re walking away from the table with the best possible deal without expert legal advice. Experienced buyers always involve top lawyers in their negotiations with owners.
Having the advice of niche experts to rely on gives you an edge at the negotiating table. In every aspect of the buying process – from researching the company to drafting up the purchasing agreement – your lawyer will work to get you the best possible deal on the acquisition.
I can promise you this: the seller will absolutely bring a lawyer to the negotiation. Without a legal team of your own, you’ll be at a disadvantage from the get-go.
3. Don’t Fall Prey to Hidden Conditions or Terms
“I’m a very thorough researcher, and I always read the fine print before signing. Do I need a lawyer to buy a business?”
Absolutely. Here’s why.
When drafting up a legal contract, the wording has to be extremely precise in order to guarantee the buyer and seller walk away with the benefits and/or rights they need from the deal.
Some less scrupulous sellers will try to throw in clauses that will negatively impact you as the buyer or leave out clauses that would benefit you. A competent M&A lawyer can spot these tactics from a mile away and will insist on a contract that works to your advantage.
Nothing escapes the notice of a top mergers and acquisitions attorney. You can rest assured that you’ll be safeguarded from hidden terms in your purchase agreement when you work with a lawyer to buy a company.
4. Gain From Expert Negotiation Tactics
As I’ve said above, good lawyers are extremely talented negotiators – it’s a huge part of what they do. They can handle much of the talking and back-and-forth with the seller – or, more likely, the seller’s legal team.
I want to stress that point again – the other party will definitely have lawyers in their corner. You’ll be much better off having your own legal team negotiate with them than trying to take on their expertise by yourself.
Here’s one more thing to consider. While we all do our best to keep a level head, acquisitions can be very stressful, and sellers – particularly if they’re the founders – often have strong personal attachments to their businesses.
Lawyers always keep their emotions in check, ensuring things stay calm and collected at the negotiating table.
5. Get Great Results – Fast
Once you’ve decided to buy, you’re likely eager to get the negotiation over with as soon as possible so you can start enacting your vision for the business.
Unfortunately, these proceedings can drag on for weeks or even months if the two parties come to disagreements over the specifics. Buyers sometimes end up spending more or making concessions they would rather not make just to get the process over with.
After all, the rest of your life won’t pause while you focus on your new acquisition. If you manage other companies, handling the negotiation by yourself will be impossible without neglecting your other businesses – potentially leading to a loss of revenue from those holdings.
Working with a lawyer helps you get the results you want faster and makes you more likely to close the deal within your desired time frame – without going over your budget or saddling you with clauses and conditions you don’t want.
Do I Need a Lawyer to Buy a Business? My Analysis
I’ve made my opinion clear by now, but just to spell it out one more time: yes, you should definitely hire a lawyer before going through the buying process.
Mergers and acquisitions lawyers spend their entire careers helping clients buy and sell companies. They know every negotiating tactic in the book, as well as the risks and undesirable clauses to look out for.
Lawyers are also meticulous researchers. Before the buying process even begins, they’ll go over each and every facet of the company with a fine-toothed comb, and they’ll analyze and sum up their findings for you. You’ll come to the table with a complete picture of the business’s current standing and a facts-based vision of how you can carry it forward.
Even if you are a lawyer, having a neutral third party representing you will help things run more smoothly. You’ll also look more professional and prepared if you bring legal representation to the table.
Give yourself the best possible edge before jumping into the process of buying a business. Learn from the expert community at ETAInsider to find out how to get top-notch legal advice and safeguard your acquisition without breaking the bank on legal fees.
Frequently Asked Questions
What’s the average fee to hire a lawyer to help me buy a business?
The reason most people ask, “Do I need a lawyer to buy a business?” is because they’re eager to avoid any expenses that aren’t strictly necessary.
I can’t give you an exact estimate as to how much your lawyer might charge because it varies widely. Lawyers typically charge larger corporations a lot more than they do small businesses.
The average fee is somewhere between $275 and $375 per hour, but again, your attorney’s fee could be less than that – or a whole lot more.
What are the steps to writing a business purchase agreement?
Most business purchase agreements contain the following six elements:
- The names of both parties involved and relevant information about the business
- The company’s assets
- Any liabilities or risks associated with the company
- The agreed-upon purchase price
- Terms and conditions agreed to by both parties
- Both parties’ signatures, as well as witness signatures
Do you need an accountant when buying businesses?
After “Do I need a lawyer to buy a business,” “Do I need an accountant” is probably the second most popular question.
Personally, I think you have nothing to lose and everything to gain by getting as many niche experts on your team as possible. In fact, your lawyer will probably recommend hiring an accountant to look over the business’s financial documents and tax records.
Do your due diligence in researching these professionals before hiring them, and remember to ask your lawyers for recommendations – they’ve probably worked with great local experts in the past and can help you put together an all-star team.
