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The Legalities of Buying an Existing California Business

June 14, 2013

Posted in Business Litigation, Business Start Ups

There are pros and cons to buying an existing California business rather than starting one on your own. It can be both rewarding and risky but ultimately the outcome depends on your due diligence during the research and negotiation phases of the process.

Your first task should be finding a reliable business attorney who is familiar with the process of purchasing a business, has the time and persistence to see it through, and can fairly manage the negotiations, keeping in mind that both the buyer and seller have interests at stake.

More specifically though, there are particular issues and decisions that you should scrutinize and consider carefully. These are the items that will make or break your successful transaction and determine whether or not your purchase is a sound one.

First, your tax advisor and business attorney should be consulted on the structure of the sales agreement. Are you just buying assets, or are you going to purchase the entirety of the business, including real estate and debts? The sales agreement should be as explicit as possible because vague agreements can lead to litigation later on. Many buyers get into trouble here because they don’t take into consideration issues such as the transfer of ownership of domain names, licenses and patents, trademarks and so forth. And if the seller is dealing with a business broker, their business broker will likely have their best interest in mind, not yours. So there’s no guarantee that these items will be included in the sale unless you and your attorney bring them up.

Second, make sure that your purchase is contingent upon a full examination of the current status of the business including their customer base, financial statements, policies & procedures, employee satisfaction, pending transactions and contracts, vendor relationships and more. Exhaust every avenue and never agree to purchase the business until you’ve been allowed to do so. One of the pitfalls of buying an existing business is getting in there and finding disgruntled employees, unhappy vendors, soured contracts or other problems that never came up during negotiations. Know what you’re getting into before you sign anything. Buyers who are lackadaisical during the investigation phase often find themselves with business fraud or breach of contract issues down the road.

Finally, once you’ve done your research and you’re ready to buy, it will be time to consult with your tax advisor and attorney again on the structure of the business post-purchase. Are you going to hold the business as an LLC, C-Corp, S-Corp or something else? Also, consider what the agreement will look like if you have a partner. That produces an entirely independent series of points to consider and you shouldn’t make any of these decisions without sound tax and legal advice.

There’s a lot more to purchasing a business than this, but it’s a solid foundation for getting started. The bottom line is that when purchasing an existing business, you’re buying both the good parts and the bad. This is a risk that has to be weighed by professionals to ensure that your business investment is a solid one.

If you’re considering purchasing a business, don’t go any further without consulting an experienced California business attorney. Or, if you’ve purchased a business that isn’t quite what you expected, call The Law Offices of Tony T. Liu for help. Our effective business litigation strategies are accompanied by entrepreneurial expertise to ensure your investments are carefully protected.