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3 Mistakes When Buying a Business | Orange County Business Acquisitions

Andy Gale | 1180 Views | 03/20/2015

Buying a Small Business

Hi, my name is attorney Andrew Gale and what I wanted to cover in this video is what you should avoid at all cost when buying a small business. Earlier this week I had a call from a friend of mine who is an accountant and he had a client of his in his office and wanted me to come over and talk to her about a business that she’d bought. We’ll call her the buyer.

Financial Statements

The buyer had been contacted by a friend, seller who wanted to sell a business, and the business went up for sale for $30,000, and there was a couple months left on the rent. The friend prepared for the buyer a short one page financial statement indicating how much the business made a month, and what the basic expenses were, and a bottom line of what the profit was on a monthly basis. Armed with that and with a bill of sale, the buyer bought the business. When she got into the business she’d realized that the representations made by the seller weren’t true and the money was losing business (business was losing money) and she wanted to know what she could do about it.

Buyer Mistakes

One additional factor was a couple of months into this purchase the original lease that the seller had ended, and the buyer went out and renegotiated a new three year lease at $2500 a month with the landlord. So now the buyer was very upset, the business was losing money, she couldn’t pay her mortgage or her rent, she was having a hard time paying employees and was wondering what she could do about the business, and what she could do about the landlord. The bad news for her was probably very little. She got stuck into a bad deal because she had made three simple but very critical mistakes in getting the business started. So let me just walk through these with you quickly, and hopefully you’ll keep them in mind if you ever get your situation or get in the situation of buying a business.

Review Financial Statements

The first mistake that she made was that she did not properly review the financial statements and/or go out and seek the advise of someone who understood exactly what would be required to put an accurate financial statement together. I asked her whether or not she’s has actually met with the CPA who called me over prior to the purchase of the business. She said, “No.” I asked her whether or not she’d consult with a business lawyer before she signed the bill of sale and she also said no. I said well why did you wait until now to talk to some advisers? And her answer was, “I just didn’t want to spend the money. It didn’t seem to be that complicated. I did some research on the internet and I thought well I could just save myself some money.” It’s true she did save herself some money in getting into this transaction. The problem of course is that it’s going to cost her a whole lot more money to get out of other transaction. So first she didn’t have any proper advice in looking at the financials. Had she just met with an accountant, the accountant would have been able to ask for supporting documentation. Which would have easily told her that this business was not generating what the seller alleged it was, and she wouldn’t have gone into the deal.

Review Purchase Agreement

The second critical mistake that she made was that she didn’t have a lawyer assist her in reviewing and drafting a purchase agreement. In a typical purchase agreement there would be terms where, if the seller had made false representations the buyer would’ve had recourse in terms going back and making a claim against the seller and trying to get out of the transaction and getting out of the deal. But rather than seeking the advise of a lawyer before hand, now she was seeking the advise of a lawyer at the end of the deal, and it was going to cost probably more money than she’d even invested in the business to get into a litigation over the matter. So that wasn’t very good.

Negotiating With Landlord

The third mistake that she made was that she went out and negotiated the lease arrangement with the landlord without again, seeking the advice of a business attorney. Had a business attorney been involved in the transaction, it would have been entirely possible to negotiate terms with the landlord. Especially in this economy. She would have had a possibility of getting out of the lease if her business had gone so good that she’d have needed to expand or move to another location. On the downside if the business hadn’t gone anywhere was she might have been able to negotiate a term that would have allowed her to get out of the business that is pay a few months worth of rent. The landlord would have excused her from the balance of the rent. But she didn’t know any of this. So instead of saving $1,200 or so in professional fees at the start, now she’s lost $30,000 in the business. It’s likely to go bankrupt, plus she’s now going to have a landlord chasing her for three years worth of rent at $2500 a month. All of this could have been easily avoided. So I would strongly urge you that if you’re in the mood to be purchasing a business, please go out, higher a trusted advisor, meet with your business lawyer. They’re going to be one of the best tools in your business toolbox that you could possibly use. They do cost a little bit of money, but they typically will save you far more money in the long run.

Certified Public Accountants

Also get integrated into your toolbox a good CPA. It’s best for you if the CPA and the business attorney have a relationship. But at minimum at least have these two advisors out there working for you. I think you’ll be much happier as a business person and you’ll tend to make much better business decisions. If you have any questions, please call us. We’re more than happy to consult with you and give you some guidance on what should be a very happy and profitable experience for you. Again, my name is Attorney Andrew Gale. Thanks.

By: Andy Gale

3 Mistakes When Buying a Business | Orange County Business Acquisitions

Buying a Small Business

Hi, my name is attorney Andrew Gale and what I wanted to cover in this video is what you should avoid at all cost when buying a small business. Earlier this week I had a call from a friend of mine who is an accountant and he had a client of his in his office and wanted me to come over and talk to her about a business that she’d bought. We’ll call her the buyer.

Financial Statements

The buyer had been contacted by a friend, seller who wanted to sell a business, and the business went up for sale for $30,000, and there was a couple months left on the rent. The friend prepared for the buyer a short one page financial statement indicating how much the business made a month, and what the basic expenses were, and a bottom line of what the profit was on a monthly basis. Armed with that and with a bill of sale, the buyer bought the business. When she got into the business she’d realized that the representations made by the seller weren’t true and the money was losing business (business was losing money) and she wanted to know what she could do about it.

Buyer Mistakes

One additional factor was a couple of months into this purchase the original lease that the seller had ended, and the buyer went out and renegotiated a new three year lease at $2500 a month with the landlord. So now the buyer was very upset, the business was losing money, she couldn’t pay her mortgage or her rent, she was having a hard time paying employees and was wondering what she could do about the business, and what she could do about the landlord. The bad news for her was probably very little. She got stuck into a bad deal because she had made three simple but very critical mistakes in getting the business started. So let me just walk through these with you quickly, and hopefully you’ll keep them in mind if you ever get your situation or get in the situation of buying a business.

Review Financial Statements

The first mistake that she made was that she did not properly review the financial statements and/or go out and seek the advise of someone who understood exactly what would be required to put an accurate financial statement together. I asked her whether or not she’s has actually met with the CPA who called me over prior to the purchase of the business. She said, “No.” I asked her whether or not she’d consult with a business lawyer before she signed the bill of sale and she also said no. I said well why did you wait until now to talk to some advisers? And her answer was, “I just didn’t want to spend the money. It didn’t seem to be that complicated. I did some research on the internet and I thought well I could just save myself some money.” It’s true she did save herself some money in getting into this transaction. The problem of course is that it’s going to cost her a whole lot more money to get out of other transaction. So first she didn’t have any proper advice in looking at the financials. Had she just met with an accountant, the accountant would have been able to ask for supporting documentation. Which would have easily told her that this business was not generating what the seller alleged it was, and she wouldn’t have gone into the deal.

Review Purchase Agreement

The second critical mistake that she made was that she didn’t have a lawyer assist her in reviewing and drafting a purchase agreement. In a typical purchase agreement there would be terms where, if the seller had made false representations the buyer would’ve had recourse in terms going back and making a claim against the seller and trying to get out of the transaction and getting out of the deal. But rather than seeking the advise of a lawyer before hand, now she was seeking the advise of a lawyer at the end of the deal, and it was going to cost probably more money than she’d even invested in the business to get into a litigation over the matter. So that wasn’t very good.

Negotiating With Landlord

The third mistake that she made was that she went out and negotiated the lease arrangement with the landlord without again, seeking the advice of a business attorney. Had a business attorney been involved in the transaction, it would have been entirely possible to negotiate terms with the landlord. Especially in this economy. She would have had a possibility of getting out of the lease if her business had gone so good that she’d have needed to expand or move to another location. On the downside if the business hadn’t gone anywhere was she might have been able to negotiate a term that would have allowed her to get out of the business that is pay a few months worth of rent. The landlord would have excused her from the balance of the rent. But she didn’t know any of this. So instead of saving $1,200 or so in professional fees at the start, now she’s lost $30,000 in the business. It’s likely to go bankrupt, plus she’s now going to have a landlord chasing her for three years worth of rent at $2500 a month. All of this could have been easily avoided. So I would strongly urge you that if you’re in the mood to be purchasing a business, please go out, higher a trusted advisor, meet with your business lawyer. They’re going to be one of the best tools in your business toolbox that you could possibly use. They do cost a little bit of money, but they typically will save you far more money in the long run.

Certified Public Accountants

Also get integrated into your toolbox a good CPA. It’s best for you if the CPA and the business attorney have a relationship. But at minimum at least have these two advisors out there working for you. I think you’ll be much happier as a business person and you’ll tend to make much better business decisions. If you have any questions, please call us. We’re more than happy to consult with you and give you some guidance on what should be a very happy and profitable experience for you. Again, my name is Attorney Andrew Gale. Thanks.

By: Andy Gale