It’s the American Dream for some. After decades in the corporate world, you want to semi-retire and go into business for yourself. But unfortunately, this dream can turn into a true nightmare. I’ve seen it happen too often, and each time it breaks my heart. Remember, by acquiring an existing business, you are taking over someone else’s business issues (past and current). Be very, very careful!
Ok, so I have three friends who are business brokers. They should probably not read this article, or they will hate me forever. But what I have to say must be said. And of course, keep in mind that this article is merely the opinion of one attorney. And I’ll preface this advice by saying that if you do wish to purchase an existing business, you had better make sure that you use an experienced business broker to assist you. Make sure that he is a member of your state business brokers’ association. This is a not-for-profit organization which full-time business brokers join voluntarily to gain exposure for their listings, as well as industry standard forms and training. If he has some excuse as to why he’s not a member of this important organization, find someone else.
Buying an existing business is much, much riskier than buying a house, stock, bar of gold or jet plane. There are so many things that can go wrong, even if you are the sort of person who “does your homework.” Here are some reasons why you might not want to buy an existing business:
Does it have real estate? If not, then you’re buying something that you can probably create on your own for cheaper.
Are you buying into a franchise? If so, that might be an exception to the above rule. However, buying a franchise requires a whole different level of due diligence. To keep it short, my advice is to invest a few hundred dollars into having a business law attorney review your franchise agreement and other documentation. Part of my franchise agreement review includes some candid advice and screening, as a devil’s advocate, to make sure that you really know what you’re getting into. The legal consultation will go one of two ways:
- After reviewing your documents and discussing your new business with you for about a half hour, you will be reassured. We will make sure that the documents are legally sufficient to protect you, and that there are no “red flags.” I will feel good about being your business law attorney for many prosperous years to come; OR
- After reviewing your documents and discussing your new business with you for about a half hour, you will be terrified. The documents may or may not be in legal order. I will share my concerns about the overall business strategy that you are contemplating. You will think that I am a killjoy, and that all I want to do is to scare you away from your dreams of living in luxury and only working 10 hours a week. But will thank me later when you still have your 401(k) and the guy who does end up buying into the franchise files for bankruptcy.
Hidden dangers that won’t be discovered through normal due diligence may include:
- Uncashed business owner checks (phantom owner benefits)
- “Expired” or soon to be expired products which count as inventory
- Unknown regulatory changes that will adversely affect your business
- Labor law violations, whether known to the seller or otherwise
- Competing ex-owner or employee
- Unpaid vendors and suppliers
- Unpaid utilities or phone/internet problems
- Nasty landlord who looks for reasons to give you grief; and
- Imminent lawsuits from anyone, that have not been filed yet.
Downright fraud by the seller is also a common risk. Watch for:
- Secretly encumbered, or not even owned business assets
- Fake set of books
- Gross underestimate of outstanding gift cards, Groupons, etc; and
- Owner secretly planning on setting up secret, competitive business and has already started taking customers and employees.
Finally, whether on its own or in conjunction with some of the above legal bombs, predatory “seller financing” can be dangerous. This is particularly true when the terms are set so that it is intended for you to fail, lose the business upon default with no refund of your deposits.
What to do if you find out that you got a raw deal? The sooner that you act, the better. Contact a legal professional and have your documents reviewed. You might be able to “undo” the transaction, or even seek additional damages from the seller. At the least, you can strategize as to the best way to mitigate your business loss, and to protect your personal assets from creditors.