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Considerations in Buying or Selling a Business in a Down Market

01/01/2009

This is the seventh in a series of brief articles that Moye White is sending to its clients and friends to provide practical advice about the opportunities and challenges presented by today's economy.

It seems that with each new day the financial news grows increasingly grim. However, regardless of whether you are looking to buy or sell a business, a downturn in the economy does not mean that you need to sit on the sidelines and wait until the economy improves to get a deal that works for you. Doing your homework and taking the right steps now to maximize your position can make all the difference when the time comes to buy or sell.

Selling a Business

  1. Performance. Selling a business that either is growing or shows stable financial performance is easier than selling a business that has suffered losses. In a tough economy it is more effective to focus on the bottom line. Come up with ways for customers to save money on things that you know they must have. Lower costs proactively. Try to renegotiate your rent, trim labor costs, and don't be afraid to ask service providers for price cuts. Any actions you can take to increase profits and reduce costs will make your business more attractive to potential buyers.
  2. Get Your Business in Order. When buyers are evaluating your business they will look at least 3 years of financials. Make sure your financials have been prepared by an accountant and are in order. Also, review all agreements, leases, customer and vendor contracts and your company's incorporation status. Is everything up to date? Is your business in compliance with all federal, state and local regulations?
  3. Obtain a Business Valuation. Obtaining a valuation from an independent source will give you a good idea of what your business is worth. Knowing what your business realistically can fetch in a sale will allow you to market your business more effectively.
  4. Prepare to be Flexible. The perfect buyer may be out there, but the deal they bring to the table is not likely to have the exact terms that you were looking for. Be prepared to consider alternatives, and work closely with your lawyers and accountants to obtain their advice and counsel when negotiating the terms of a sale. Since access to bank financing may be limited, seller financing is common in many transactions.

Buying a Business

  1. Performance. Especially in a down market, buyers need to know exactly what they are buying. Consider looking at monthly financials. This will help identify when a business began to decline, and what the trend has been since it started to decline. Closely review any business valuation. When was it prepared? Does it take current trends into account?
  2. Due Diligence. There may be bargains out there but be wary of fire sales because they may signal trouble ahead. Does the business operate in a highly regulated environment? Is the business in compliance with all of its regulatory obligations? If you buy the business, will you become responsible for regulatory violations previously committed by the seller?
  3. Buying a Business Out of Bankruptcy. If you are purchasing a business out of bankruptcy, unless appropriate precautions are taken it is possible for certain liabilities and claims to follow the assets that have been purchased. For instance, patent and trademark infringement claims or environment liabilities can follow the assets and be a significant burden for buyers. However, proper planning and drafting of the sale document approved by the Bankruptcy Court can potentially limit your exposure.

Remember that in today's economy, whether you are buying or selling, it is critical that you obtain legal advice before you enter into any sale or purchase. Proper planning can make all the difference.

For more information contact: Trish Rogers or Mimi Larsen at (303) 292-2900.

If you prefer not to receive any unsolicited e-mails regarding Moye White information, please contact us at info@moyewhite.com.

Moye White LLP has prepared this bulletin to provide general information, however this bulletin does not provide legal advice and does not create an attorney-client relationship between the reader and Moye White. No legal or business decision should be based solely on the content of this bulletin.

ABOUT THE AUTHOR

Patricia J. Rogers

Attorney