Legal Steps to Buying a Business

November 17, 2022

Whether you are buying a car, house, or business, there is a process involved - sometimes a lengthy one. When it comes to buying a business, the legal steps are one of the most important aspects and not one to glaze over. We are here to help you identify the critical steps to purchasing a business in the most seamless way possible.

First things first, it is essential to involve a lawyer to assist you every step of the way. Lawyers will ensure that you are taken care of and can help in reviewing papers and clarifying/simplifying the legal language.

Let's dive into the nitty-gritty:

1. Find a business of interest

Finding a business that you connect and interact with is not easy. Unfortunately, not every business owner is reliable, making the buying process even more worrisome. To help avoid this, DealBuilder is here to help you know which businesses are legitimate. All you have to do is find a company that is of interest to you without having a fear of being burnt.

2. Determine the price

The next step is to determine the price to understand if it is a reasonable option for you (you can learn more about this in this blog). This benchmark will help you see if you will proceed with the listing or move on to the next. It helps to avoid wasting time or dwelling on something you cannot afford or does not meet your needs.

3. Letter of Intent (LOI)

After finding the right business, the next step is to write and present a non-binding Letter of Intent (LOI). An LOI is a pre-contractual document between two parties that is intended to enter into a binding agreement. A letter of intent is useful as it sets out all the terms and conditions of a deal on paper, helping avoid confusions that can occur from ‘handshake deals’. Further, it shows the Seller that you are serious about buying the business and moves the deal to the next step in the process - due diligence.

4. Conduct due diligence

After signing the LOI, the Buyer starts conducting due diligence on the business. As the Buyer, you can look into the finances, contracts, projections, employees, taxation documents, and anything else you might need to operate the business.

5. Draft of a legally binding agreement

Concurrent with due diligence, the Buyer’s lawyer will prepare the legally binding ‘Purchase & Sale Agreement’ using the terms outlined in the letter of intent (purchase price, closing date, and a bunch more legal terms/protections). Once the draft is completed it is presented to the Seller’s lawyer for review and edits. The document then goes through a series of back-and-forth edits between both lawyers, where they typically negotiate various legal terms. Our advice, generally, is to allow the lawyers to squabble over specific legal details (for example, which jurisdiction should governing law apply) but not business terms such as the offer price, performance payments, training terms, etc. Not only is it expensive to have lawyers negotiate these business terms - they often aren’t the most qualified people to do so. Instead, either negotiate these business terms directly with the Buyer/Seller or utilize your Business Broker or Deal Manager to help you.

6. Close deal and transaction

The final stage is closing (queue sigh of relief). When each party is happy with the final terms, final negotiations occur. After reaching an agreement, both Buyer and Seller sign the Purchase & Sale Agreement, funds are transferred, and the deal is closed.

Here at DealBuilder, we help facilitate this entire process to ensure professionalism, legitimacy, and smooth transitions. You can learn more about us here: www.dealbuilder.co

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