How to Buy a Business in Wellesley MA

There are a number of steps in buying a business.

First, you have to find the business you want! Whether you are expanding your existing business, buying something for investment or buying something to operate, the first step is to identify the “target.” Acquirors use investment bankers, business brokers and networking to locate a target. Using a third party to help sometimes makes the initial contact easier.

The next step is to begin discussing terms. While the details are not final until all the documents are done, the buyer and seller often start to have general discussions of price, whether the existing owners or employees will stay involved in the business and whether any liabilities will be assumed as part of the purchase. The parties may also want to get a sense of each other, to start deciding whether the other is credible and whether the other is likely to stay motivated enough to complete the deal. It may be that one party wants to generate a “term sheet” or “letter of intent” at this stage – an outline of the major business terms that the lawyers can use to start drafting the documents – but most lawyers representing buyers suggest doing some investigation of the business first.

Investigating a business is called “due diligence,” based on a phrase in an old legal case. A prospective buyer must usually sign a confidentiality agreement or nondisclosure agreement. The due diligence process then involves learning about the financial health, history and prospects of the business, its market and customers, its history of employee relations and history of liability and other financial and operational risks. It also involves understanding any major commitments or contracts it has. Buyers sometimes use third parties to help them value a business or conduct other parts of the due diligence investigation. Business lawyers are involved in the investigation early on.

As the due diligence is winding up, parties begin negotiating in earnest. Sometimes they draft a term sheet or letter of intent, but sometimes they go right to the definitive documents. The negotiation process covers a handful of specific points, such as structure (which may be driven by tax concerns), financial terms, noncompetition agreements for former owners and the “representations and warranties” that shift risk between the parties over factual matters or uncertainties involving the business. Even though the legal documentation may seem complicated, it is the tip of the iceberg when it comes to buying a business.