Friday, November 21, 2014

Buying a Business — Part 2

As I mentioned in Buying a Business - Part 1, I've been considering buying a small local business and, to that end, I submitted a Letter of Intent along with a small deposit in order to get the Due Diligence process started,

All a Letter of Intent really does, is provide a document that specifies you are interested in a particular business, and that you would like to purchase it pursuant to the original offer, within a certain period of time, as long as everything is as advertised. From the sellers perspective, it memorializes their intent to negotiate toward a sale. Additionally, you may add any other contingencies (provided all parties are in agreement), which basically allows you to walk away from the deal and get your deposit back.

And so, my Letter of Intent included a three-day familiarization period before making a final decision as to whether this would be the right business for me.

Call me difficult if you like, but in my opinion, I really needed to spend a little bit of time immersed in the business, in order to determine if it was a good fit.

This may or may not apply to other businesses for sale, but since this particular enterprise involves manufacturing, I felt I definitely needed to find out if I was going to be able to handle that part.

The seller agreed and, so far, I've spent two full days at the premises trying to absorb as much as possible while actually doing some of the tasks that are involved in the manufacturing process. I will be there again tomorrow, bright and early, to do more of the same. So far, I am feeling more and more comfortable with the business, and the three-day Familiarization requirement certainly was a good idea.

After the familiarization period is over, I will then submit a Purchase Agreement which will allow me to conduct a thorough due diligence, which will include the company's financial records for the last three years.  After all that is done, we will set up the exact closing date and place, and make the transfer final and official.

Besides of the customary non-compete agreement, and all the other legalese, the Purchase Agreement will also include an "official" training period, which will be necessary, especially in this case. Having said that, and as long as the seller agrees, I plan to keep going back to the shop as much as possible until we close, in order to get better and better at each and every task.

Since I will be wearing most of the hats during and—for at least a while—after the transition period, it is imperative that I master as many (ideally all) of the functions, so the business continues to operate without any hiccups.

Yes, buying a business... any business, has its own set of challenges, so it will be a while until I feel totally comfortable and relaxed as the new owner.

A word of caution. Although Letters of Intent usually are non-binding documents, you still need your attorney to look it over to insure you're protected. Needless to say, if you are considering purchasing an existing business, you should already have a business law attorney working for you.

More to come, so stay tuned!