- Warranty issues in any company involved in creating goods or supplying services can be a major liability. Most, smaller businesses do not accrue any reserve for warranty expenses.
It is important that the cost of warranty issues be resolved with the seller prior to acquiring the business. If you purchase the shares of the company you are accepting any and all warranty liability costs and issues for warranty claims in the period prior to acquiring the business. Do not accept statements from the seller that warranty costs are very low. Very low in the seller’s mind could be very high to you. Warranty bill backs, if there are to be any, to the seller should be defined in the agreements including labor costs (what rate) and material costs and terms of payment (will it be deducted from the buyers debt to the seller or invoiced to the seller weekly, monthly or quarterly and on what payment terms).
- If you are acquiring a “service” business, remember that you are primarily buying a business whose assets are people. Buying people is always a dangerous game, because you can never be 100% sure that the people will stay on after you acquire the business. Before acquiring a service business, investigate the market for the skills of the types of individuals that you will be employing. Can your employees obtain equivalent and or better paying jobs somewhere else, is there a market shortage or a glut? This can usually be accomplished by reading the local newspaper classified ads. If you are looking at acquiring a business that does locksmith work and the local classifieds have ten advertisements from your potential competitors looking for locksmiths you may be acquiring a staffing problem! You can also contact some recruitment agencies in the area the business is located in and ask them if they have a lot of call for, or do they have a lot of people looking for work with those disciplines.
- It is not unusual to discover that the current owner of the business has not been keeping up with pay increases for the employees. Every dollar that he gives out in raises reduces the company’s profit and that will relate to the selling price he sets on his business (in some cases it may be as much as four dollars more for him for every dollar he holds back from employee increases (if you paid the seller four times last years profits to acquire the business)). I have experienced cases where the new owner was confronted with increasing salaries and hourly rates by almost 25% because the previous owner had not given out increases in over two years.
- When buying a contracting business there will most likely be a requirement for licenses of some sort. Some areas allow you to “buy” the use of someone’s license in order to operate the business. Make sure you understand the legalities involved and ensure that you have a backup plan if for whatever reason you loose access to the license that the business currently utilizes.
- When choosing a lawyer, do not forget the old adage that you get what you pay for. If one lawyer charges you $100 an hour but takes 10 hours to do the same thing as a lawyer who charges $150 an hour but only takes 5 hours to do the same amount of work, which way are you better off? Lawyers are specialists, they all have their areas of expertise, do not hire a real estate lawyer to do the work on your business closing agreements and documents.
Once you have found a business that you want to acquire and have basically come to an agreement with the seller on the major terms and conditions one of the parties, the seller or buyer will “draft” the agreements. The party that drafts the agreements goes to his lawyer and has him produce a set of agreements that will be the agreements that both buyer and seller sign in order to consummate the transaction. The reason the term “draft” is used is because they are a set of documents, created by a party on one side of the transaction that have not yet been agreed to, or vetted by the other party.
You may think that it is more economical for you to have the seller draft and it probably is, at least up-front. But it makes it a lot harder for you to add/or change things. If you draft then you start off with exactly what you want and the seller must take exception. Conversely, if the seller drafts you are the one who must take exception. People have a tendency to accept the smaller things when presented to them, rather than appear petty by saying they want it changed. I have found that, in general, the party that drafts gets more of what he wants than the party that doesn’t. As well, your lawyer will add the protection clauses that are appropriate for you as a buyer, where the seller’s lawyer will generally not include those clauses.