Buying a Business – Some of the Pitfalls and Issues
As a Maryland business lawyer practicing in Howard County, Maryland, and surrounding Maryland counties, in the past 30 years, I have seen many successful business purchases as well as nightmares.
Here is a list of some, but certainly not all, of the pitfalls and issues involved in the buying and/or selling of a business:
- Little or no attention to the tax affects of the purchase: Consider not just how the goodwill will be allocated between Buyer and Seller, but the selection of the type of entity that purchases the business. Consider capitalizing versus undertaking loans so that the funds used to start the business and left in the business are not difficult to repay to the owner. Consider methods of depreciation and the benefits of electing S Corp status.
- Broker/Agent issues: The Purchaser’s failure to recognize that the Broker is often the agent of the Seller and is not looking out for the interests of the Purchaser/Buyer. The Broker wants the deal to go through at any cost to the Purchaser so long as the Broker obtains the commission for the sale. Accepting from the Broker that the sales contract is ”standard” and does not need to be reviewed by a lawyer.
- Failure of the Purchaser to protect the new business from assuming the debts of the Seller: There are numerous ways to approach this issue, such as buying the assets of the business and utilizing the Bulk Transfer Act. It’s best for you to have an attorney represent you.
- By agreeing to place a factual statement in the Sales Contract between Buyer and Seller that the business’s income is so much per month, the Seller doesn’t realize that the Seller has made a binding obligation/ representation in which the Seller will be obligated to pay damages if the representation is untrue.
- If you are not represented by a lawyer: Not realizing that the Buyer’s lawyer is not representing you and that, in fact, is only looking out for the interests of the Buyer.
- Failure to realize upon the sale of inventory, documents, goods, products, and equipment that the State of Maryland may be entitled to sales tax upon the sale of a business or profession.
- Doing a background check on the Seller to make sure the Seller is reputable, does not have a criminal record or has already sold the business to someone else.
- The Buyer’s failure to uncover security interests that are not known to the Buyer but that under the laws of this state are presumed known because they are of public record.
- Financing the Buyer who has a poor credit risk or who has no personal liability because the loan is not personally guaranteed by the Buyer. If the Buyer is married, it is extremely important to have the Buyer’s spouse guarantee and be personally liable on the loan in the event of default.
- Short term lease: Before entering into a sales agreement, make the sales agreement contingent on extending the current lease for the time and terms that will best protect your business. You don’t want to be building up a business at the starting location and to find that your landlord will not extend the lease. Instead, the landlord will benefit from the goodwill you have developed and lease the premises to someone else or to himself.
- Restrictive Covenant: The need to prevent the Seller from opening the same business nearby.
The above issues are just a few of the pitfalls that Buyers face when purchasing a business and you need a business lawyer to deal with these issues as well as many others.
Contact Fredric G. Antenberg, a Maryland business lawyer located in Columbia, Maryland, and practicing business law in Howard County, Maryland and surrounding Maryland counties.
Call me for an appointment at 410 730 4404.