Buying a business is a big and expensive decision. Whether it’s a franchise or a local establishment, the process is rarely straightforward. Each transaction has its caveats and unique buy-sell agreements and contracts. A corporate lawyer is critical in guiding you through this process.
While some legal work can seem simple and straightforward, agreements and contracts are more complex once you get into the details. Hiring a lawyer from the beginning of the purchase will cost less than hiring one to fix problematic situations if things go wrong.
These are just a few of the legal documents that you should ask a lawyer to look over when buying or selling a business.
Buy-sell agreement
A buy-sell agreement is the bedrock of any transaction in buying or selling a business. It outlines the price and conditions discussed by both parties and legally binds the terms. With such a large and important transaction, it is not advisable to sign contracts without first consulting a lawyer. Contracts have tons of legal jargon and complex clauses that someone with no legal experience would not understand. Hiring a lawyer solidifies that you know what you’re getting yourself into.
There are also different ways you can purchase a business. Two primary methods are: Buy by Asset and Buy by Share. In Buy by Asset, the purchaser is only taking on the assets of the business. This method requires documents for each asset being transferred. Because assets can include client or vendor contracts, it may also require an agreement from third parties.
In a Buy by Share transaction, the purchaser buys 100 percent of the company including all its assets and liabilities. A Buy by Share transaction is less complicated because the main documentation is the transfer of shares. Sometimes, shareholder loans may also have to be transferred.
Additionally, different industries can have unique industry-specific terms and processes in buying and selling a business. This may require a lawyer with specialized knowledge in the industry to review the documents or require that the lawyer brings on a consultant to translate the jargon and technical terms.
Hiring a lawyer can help you figure out which method of purchase-and-sale is most beneficial to you. They can also advise on adding specific clauses or looking out for clauses that the other party has added when the agreement is drafted. For example, adding a bailout clause could be critical, in that it provides an exit out of the contract if the business turns out to be less than expected. And adding a specific non-compete clause can also help you ensure the success of your newly-owned business while still being fair to the seller — no one wants to buy a restaurant only for the former owner to open a new one across the street.
Ongoing business contracts
Purchasing a business, whether by share or by asset, means that there’s a lot of contracts to review. There’s possibly a contract for every supplier and client, one or more for any commercial leases, contracts for every employee, and much more.
Hiring a lawyer protects you in these cases. They look for red flags or ways to make these contracts loophole-free. In buying a business, knowing each contract is knowing what you’re getting yourself into.
Shareholders’ agreement
If you’re financing your purchase with the help of a partner or partners, you and your partner(s) will need a shareholders’ agreement. Ideally, a lawyer should draft this agreement and should forecast how the agreement will impact other obligations and agreements that the shareholders and business have. A faulty shareholder’s agreement can cause massive problems in both a prosperous business and a failing one.
The shareholders’ agreement ultimately protects you and your colleagues from situations that can occur in the future. Individuals dropping out half-way into the process is not uncommon, so it’s critical to know what happens in this scenario.
Hiring a lawyer when buying a business is important. It may be tempting to save a few thousand dollars by thinking you understand every document yourself, but it’s often not that simple. Legal help will make sure that there are no surprises and that you’re protected from worst-case scenarios.