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Ways to protect yourself when buying or selling a business

Buying or selling a business is always a big decision. Not only is there the potential for lots of money to change hands, it represents a new direction in your own career path. Because so much is at stake, it means you want to be as thorough as possible.

Making a mistake on a sale or purchase could result in regret down the line, with opportunities to address these problems having long passed you by. Here are a few things to keep in mind if you’re thinking about buying or selling a business.

An asset or entity sale?

Generally speaking there are two types of business sales.

An asset sale is when someone buys some or all of the pieces of the business rather than the business itself. This could mean inventory, machinery, property, licenses, equipment or other assets. An entity sale is when someone buys the totality of the business entity outright – the good, as well as any of the potential bad.

There are advantages and disadvantages to both, including for tax purposes and taking on potential future liabilities. What will work best for your situation depends on the circumstances, and may be something to discuss with an attorney.

Do not cut corners on due diligence

This is one of the most important aspects of the deal. A period to do due diligence is a chance for a buyer to inspect everything about a business, including:

  • Tax and financial records
  • Physical assets
  • Real estate
  • Intellectual property
  • Licenses and permits
  • The company’s workforce
  • Existing material contracts
  • Customer information
  • Any other items that come up

If you’re buying, do not cut corners during this process. In addition, ensure there is an opportunity during or after the due diligence period to exit the deal if you don’t like what you find. If you’re selling, ensure there is enough time to allow a thorough vetting without causing anything to unnecessarily drag.

A non-compete agreement

If you’re buying a business, you may want to seek a non-compete agreement from the seller. (Or, if you’re selling a business, don’t be surprised if the buyer approaches you about a non-compete agreement.)

This is a way to help make sure that whoever is selling the company doesn’t simply start a new, similar business right away – providing tough competition to the company they just sold, or potentially even taking customers back.

Wrapping things up

Keep in mind that during all of this, you’ll want to be working within the framework of a final purchase agreement. It’s a document that should be as airtight and protective as possible while providing direction for how everything should proceed.

Because of the significance of a business sale or purchase, getting all of the little details right is key, and is something an attorney may be able to help with.

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