Why Pre-Negotiation is Important
As a business owner, I’ve started and also purchased existing businesses, and along my entrepreneurial road, I’ve found skipping pre-negotiation planning for a business acquisition is a big mistake. Although pre-negotiation can include compromising on price, assets purchased and even inventory, avoiding due diligence can be detrimental, especially if you don’t know what to look for—you could end up with something you don’t want or worse, something you forgot to claim or ask for in negotiations.
Gather What You Need
Before you enter into pre-negotiations, if you are prepared to sign a confidentiality agreement--meaning you won’t offer up any information on the existing business to any outside party–you’ll need to ask for certain items, including:
Three years of financial statements – This means not just the balance sheet, but profit and loss statement and income statements.
Current financial statement – Along with the obvious, see if you can obtain a trial balance—this financial accounting document shows everything a general ledger does only in a summary format.
Tax returns – You can ask for these, however, most existing business owner’s attorneys will tell you they won’t pass them along, but it doesn’t hurt to ask.
Asset detail – I have found that many existing business owners (shamefully) say they don’t have a listing of their assets, what the original purchase price was and any depreciation claimed on the asset. If you are told no such list exists, ask the business owner to get the detail from their CPA as this documentation is included in all corporate tax returns. This includes intangible assets as well.
Schedules or journals – If possible, ask for certain schedules or journals like accounts receivables, payables, short and long term debt and any other debts or other income anticipated.
Inventory – Another item business owners lose track of fast is actual existing inventory. Inventory can make or break a business so make sure you know what you’re buying—even if that means scheduling an inventory audit.
Business worth – Don’t just rely on the balance sheet to show determine the value of a business. The balance sheet won’t reveal everything and is easy to manipulate to show profits when there are actually losses.
Employees – Obtain a list of employees, job duties, salaries and find out it employees will be due vacation pay, if there is a retirement plan in place, and what healthcare costs will be.
Prior to starting your pre-negotiations, take the time to do some research on the business. You can obtain valuable information by:
Public Regulatory Commission – Also called corporation commissions in some states, perform a search on the owners or name of the company. What you find here can be invaluable such as if the business has filed required reports, if they are in good standing and if they have paid (if applicable) sales and use taxes or are behind.
Better Business Bureau – Do a search here as well. While every business may not be listed, if the business you’re looking to buy is, you can find out if the business has or had any unresolved complaints.
Licensing Boards – Depending on the type of business you are buying, check with local and state agencies to find out if all licenses are up to date—don’t just rely on copies the seller gives you.
Now that you most likely have tons of paperwork, take the time to go through it carefully and begin writing down questions on financials or any other documents that give you pause. Failure to do this means you aren’t performing due diligence and can come back to bite you later—it’s up to you, the purchaser to indulge in due diligence.
Next, utilize these tips for pre-negotiation planning for business acquisitions:
Initial Meeting – Here, you will most likely go through your checklist of questions (and get answers or supporting materials) and also gain insight on the purchase price desired by the seller. Don’t agree to any price—this is a get to know the business better time.
Follow-Up – If you did receive answers to questions or supporting documents requested, you will need a follow-up meeting to discuss discrepancies or obtain accuracy of documents—you may even have more questions for the seller. These types of meetings can usually be done via a phone call.
Contracts – Never, ever, ever allow the seller to prepare a contract. In addition, never agree to use the same attorney to draw up a contract for the acquisition of the business. If the seller wants his or her lawyer to create a buy/sell agreement, that’s fine, but don’t sign it until you’ve had your attorneys take a look at the buy/sell agreement. Expect your attorney to offer up things that are either undesirable in the buy/sell, clauses or compromises, which you’ll take into pre-negotiations.
Contract Meeting – You can have both attorneys argue out stipulations to the contract, but it is best if both the buyer and seller are present. Here is where pre-negotiations are very important as you will have to accept or offer up compromises—or items you want inserted, changed or deleted. For example, if you don’t want to retain any of the current employees (or employee obligations), that should become part of the buy/sell agreement. Prior to this meeting you and your attorney should pose what if scenarios to each other and see if the buy/sell agreement provides solutions to those scenarios—and solutions that will hold up in court if any disputes arise.
Final Run Through – Once the buy/sell is approved by your attorney, have the closing at the place of the business you are acquiring. Why? It’s important that before you sign, a final walk-through is performed to ensure the existing owner hasn’t darted away with any promised assets. If they have, getting them back after the contract is signed is very hard to do. Make sure the buy/sell includes a mediation and arbitration clause for settling disputes.
While these tips for pre-negotiations for planning a business acquisition are helpful, your attorney may have even more. It’s prudent for you to not just walk in, agree to an offer and sign a buy/sell. If you do this, expect unwanted circumstances—and you’ll have no choice but to deal with those problems on your own.
The old proverb, he who is his own lawyer has a fool for a client (especially if you’re not an attorney) rings so true in new business ventures and business acquisitions. Failure to follow the steps provided here may mean you’ll end up with a white elephant of a business and once you own it—it’s yours.
Jean Scheid has over 16 years experience in buying, selling and managing businesses.
Paperwork - MorgueFile/doctorbob
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