If you want to buy a business, there is no substitute for a thorough, detailed inspection of every matter related to the business in question. Parts of the inspection will be to review written materials; parts of the inspection will be visual; and parts of the inspection will be conversational.
However, do not completely rely on what the seller of the business tells you. If you are given access to the employees of the said business, talk with them about it. The seller’s goal is to make his or her business look as good as possible to potential buyers. As a buyer, your goals are entirely different — you want to find out the flaws of the business.
Representations and Warranties in a Contract
However, for any flaws that you do not find, there are ‘representations and warranties’–the heart of your purchase contract. The representations and warranties in your contract guarantee that there are no flaws (other than those disclosed in writing) with respect to each aspect of the business. A good lawyer will see that you have the seller make solid representations and warranties in your contract.
That said, representations and warranties are no substitute for your initial inspection of the business. You really should complete a thorough inspection before signing a contract. You want to discover any negative aspects or flaws before signing the purchasing agreement.
Buying a Business with Prohibitive Covenants
You should also get prohibitive covenants when buying a business, such as: a covenant not to compete, a covenant not to solicit, and covenant not to disclose, from the seller. I have discussed each one of these covenants in preceding blog entries; click the links to read the corresponding entry.
I will have more on buying a business in my next post.