By Eric D. Morton
As a business law attorney, I’ve seen firsthand how acquiring a business can be an advantageous opportunity—or a disaster waiting to happen. With that said, I thought I’d send over a few best practices to consider if you’re beginning the process of acquiring a business. Use this as a starting point, and let me know if you’d like to discuss it further.
How to value a business you’re looking to acquire
- Consider a professional valuator. A professional valuator specializes in assessing the value of a business, its securities, or its assets. A valuator will often prepare three levels of reports ranging from essential to highly detailed. In addition, a valuator can receive access to a company’s financials once a letter of intent is signed.
- Study financial documents. Make sure you get all the documents and all information. You’ll want to carefully comb through documents such as:
Financial statements for at least three years.
Tax returns
Discretionary and non-recurring or one-time expenses
Number of employees and employee compensation
Patents, bylaws, and shareholder agreements - Inspect the physical property and inventory. Your purchase may include assets such as real estate and/or equipment. Check to ensure equipment is in good working order, and if the equipment is leased, review the terms to determine what will transfer in the sale.
- Read the lease carefully. Secure a copy of the lease and review it carefully, ideally with an attorney. Look for answers like: How long will the lease last? Can you renew? Are the terms and restrictions acceptable?
- Check the company’s legal status. Confirm the company is in good standing with the state and that the owner has the authority to sell it. You’d hate to get to the end of the due diligence period only to hit a significant roadblock during the last mile.
- Be prepared to walk away. Most of the disasters come from sellers withholding information and buyers becoming enamored with the idea of owing the business. If the owners of the business are not forthcoming with all the necessary information and documents, or if anything appears shady or incomplete, then do not go forward. Don’t fall in love. This is strictly a business decision.
Having worked in business law for a number of years, I’d love to guide you through the acquisition process. My team and I are eager to help. Eric D. Morton is the principal attorney at Clear Sky Law Group, P.C. He can be reached at 760-722-6582, 510-556-0367, and emorton@clearskylaw.com