Even when a business seller and purchaser are familiar with one another, they may have different understandings about their deal scope. To avoid misunderstandings, it’s critical to enter a written contract. Here are some key terms to consider.
1. Give Me the Numbers – To independently affirm business revenue and profitability, require a third party financial audit. Request that seller certify the accuracy of its financial records, and include an offset or penalty for anything that’s proven false. Also, pay the purchase price in phases to allow time for reconciliation of any discrepancies that arise.
2. What’s the Deal? Identify all business owners, and clearly outline what you’re buying from each of them. Include a listing of both real property like inventory, equipment and office supplies, as well as “intellectual property” such as brand names (trademarks), customer lists (trade secrets), marketing materials (copyrights), and inventions (patents).
3. Who’s with Me? Will existing employees stay with the business? Unless under contract to remain, employees sometimes leave during a change in ownership. So, identify any key team members, and know their compensation and benefits structure. It may be wise to incent them to remain with the organization through a transition period.
4. What’s my Downside? Require a detailed inventory of any outstanding business disputes, governmental inquiries, liens, taxes, accounts receivable and broker fees applicable to your deal. Make sure that the purchase agreement explains who will assume those costs and risks. Likewise, agree on a process for reconciling disputes between the buyer and seller.
5. Cooperation and Non-competition – If the legacy business owner has favorable relationships with customers or vendors, require and incent them to assist in the transition. And, include an offset in the purchase price to account for customer attrition, so that you don’t pay for business that’s lost without any fault on your part. Finally, assure that the seller won’t compete with the business after your purchase.
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