Purchasing an existing business - Legal Do’s and Don’ts

Purchasing an existing business can be a very rewarding endeavor. The first thing that comes to mind about purchasing an existing business is the avoidance of "start-up" costs. The initial costs of creating a new business can be staggering, in addition to the costs for advertising that new business, with no guarantee of a return on your investment. The existing business, however, will have a track record that you can look at as far as income and expenses. While previous performance is no guarantee, it at least gives you a ballpark reference as to what you can expect.

There are many legal considerations when purchasing an existing business. First and foremost is to know exactly what you are purchasing. Are you purchasing the entire business and all of its components, or are you merely purchasing the assets of the business? This is an important issue because you want to make sure that you are not purchasing another person’s mistakes. If you are purchasing the entirety of another business, you may be assuming responsibility for all of that business’ debts and liabilities, known or unknown. For that reason, we usually recommend that the purchase only include the assets of the existing business. There are exceptions to this rule which are based upon the size, goodwill and standing of the existing business, but that is to be considered on a case by case basis.

When making an Asset purchase, it is extremely important to set forth in writing exactly what the assets are, so there is no confusion after the transaction closes. Make a list of the physically identifiable assets, i.e. the copy machine, the customer list, the desks and chairs, etc... You should also make a list of the intangible assets, i.e. the phone number of the existing business. The failure to consider the exact assets included in the purchase account for many of the business transaction claims that are brought into my office.

The next legal consideration regards the type of business that you are purchasing. Whether it’s a Pizza shop or an Insurance business, you want to make sure that the Seller will not open up a similar business right next door to the business that you are purchasing. This is where a Covenant Not to Compete is essential. Almost every type of business purchase transaction should include such a covenant. The Covenant Not to Compete should prevent the Seller from doing many things, including opening a similar establishment, using client or customer lists of the established business, hiring employees of the existing business or advising others to use a competing business. These Covenants are typically limited in time and location. If the Seller is unwilling to enter into such an agreement, the business may not be worth purchasing.

Take the time and effort to consult with your local attorney if you are considering purchasing an existing business. It may save you thousand of dollars and hours of time in the long run.