Buying a business creates exciting possibilities, but it can also expose you to unexpected liability. Whether you are an entrepreneur who wants to be your own boss, or your company has targeted a business to add to its portfolio, you must make sure your acquisition doesn’t lead to buyer’s remorse. Here is a short list of oft-overlooked details that can turn a good deal into a disastrous one:
- Debt — When you buy the business, are you assuming the existing debt? The answer depends on how you structure the deal. Your due diligence must include uncovering all sources of debt and figuring those obligations into the sale price.
- Tax liability — Has the present owner been paying FICA taxes for employees, or has he or she erroneously classified them as independent contractors to avoid the tax? Assessments for the IRS Trust Fund Recovery Penalty can be staggering, so you’ve got to clear up this kind of issue before assuming ownership.
- Lax regulatory compliance — The current owner might also have violated ERISA by underfunding retirement plans. He might also have failed to fulfill all licensing requirements.
- Bad contracts — In the worst case scenario, you get stuck with all the bad contracts but cannot assume any right to the good contracts. A thorough review of all contracts is needed before any deal goes through.
- Essential employees — You may want to put your own people in place, but separating key workers who embody the company’s institutional memory can seriously impede your transition. Reach out to key employees before you let a valuable asset walk out the door.
- Customer goodwill — Change can be unsettling for previously satisfied clients, who often wonder if they will get the same level of service from new management. You may believe the business needs to be updated, but making a series of radical changes without preparing your important clients can produce a backlash.
- Intellectual property — When you purchase a business, you want to obtain its most valuable asset: its IP. Buying the Coca-Cola Company without getting the formula for Coke would be a disaster. You must make sure all of the company’s IP is secure and transfers to you. If the previous owner has not protected its trademark, your due diligence must discover whether trademark protection is possible. You must also make sure noncompete agreements are in place, so that separated employees don’t take trade secrets with them and use them with impunity.
The purchase of a business is a major investment that will either pay dividends or drain your resources for a long time. By partnering with an experienced business attorney, you can take the necessary steps to enhance the value of the transaction or avoid what could have been a burdensome deal.
Becker & Hebert provides a full complement of business, real estate, and government legal services for individual, corporate and municipal clients throughout Louisiana. Call us at 337-446-0278 or contact us online to schedule an appointment at our Lafayette office.