Power of Attorney - May 2001

How to Avoid Costly Mistakes When You Buy A Business

by Jacqueline S. Ackerman

Buying a business or investing in a private company that owns a business is an immensely complicated matter. After a lot of time, effort and expense, you can end up with either an opportunity to make money or a financial nightmare, depending in large part on whether you are represented by competent counsel during the purchase process.

An experienced business attorney can steer you safely past the pitfalls that await the unwary buyer, enabling you to identify (and avoid closing) the deals that are wrong for you. Moreover, with his or her guidance, you should be able to close the deals that are right for you on more favorable terms, increasing your potential for profit.

You should expect your counsel to take these actions, among others, when assisting you with a business purchase or investment:

Obtain a Due Diligence Period. If you commit yourself to closing the deal before you have identified and assessed the risks involved, you are allowing the possibility of being blind-sided and inviting serious trouble. In most cases it is impossible to perform thorough investigations before you sign the purchase agreement. Therefore, you need the contractual right to take time to perform your investigations after signing. This period of time, usually called a "due diligence period" or a "feasibility period", gives you the opportunity to gather and evaluate information about the seller and the business and make an informed decision whether to proceed with the deal or terminate it. Counsel should help you determine what information you need and how you are going to obtain it, as well as negotiate the terms and conditions of the due diligence period.

Give You an "Out". After you sign the purchase agreement, events may occur, or fail to occur, that cause you to change your mind about closing or prevent you from closing. However, unless you have the contractual right to terminate the deal, you may be obligated to close anyway. Moreover, if you fail to close, you may be liable to the seller for substantial damages and face a lengthy and expensive lawsuit. Counsel should advise you of the conditions under which you should not close, and make sure you get the right to terminate the deal under those conditions.

Regulate the Seller’s Conduct Before Closing. If left unchecked between the time you sign the purchase agreement and the time you close, the seller may damage or destroy the business or significantly reduce the value of the interest you are buying in the seller’s company. However, if you spell out in the purchase agreement what the seller must do, and what he may not do, during this time period, you stand a better chance of getting what you have bargained for when you close. Counsel should make sure that the agreement contains the provisions necessary to protect you from the seller’s actions or inaction before closing.

Get Written Representations and Warranties From The Seller. When the seller gives you written assurances about key factual matters, he or she may disclose important negative information that you failed to discover during the course of your own investigations. Once informed, you are in a position to decide whether to terminate the purchase in light of this information, or negotiate better terms from the seller to compensate for it. Counsel should explain what representations and warranties you need and the risks you run without them.

Restrict the Seller’s Conduct After Closing. The seller can also harm you after closing, if not prevented from doing so. For example, the seller may go into competition with you, taking the customers you expected. Or, the seller may use for his or her own benefit the trade secrets you acquired. Counsel should advise you how to legally restrict competition by the seller after closing and safeguard your valuable trade secrets.

Each business purchase or investment presents unique facts, circumstances and legal issues. To learn more about how to protect yourself and maximize your opportunity for profit, consult an experienced business attorney for legal advice that is tailor-made to fit your needs.

Jacqueline S. Ackerman
Jacqueline S. Ackerman is an attorney with the Las Vegas-based law firm Sklar Warren Conway & Williams LLP. She has handled complex business and real estate transactions for over 20 years.