Becoming a business owner is a dream come true for many people. Owning a business is similar to owning a home. A person can choose to build it from scratch or they can buy an entity that is already established. In the case of the latter option, there are legal pitfalls that people need to be mindful of. Some of these legal pitfalls are not so obvious. So, if a person is a first-time buyer, they can easily become victims. Knowing and actively avoiding these hurdles will give the buyer space to enjoy their investment.
Legal Pitfalls to Avoid When Buying a Company
Some of the legal issues people fail to consider when buying a company include:
- Not Signing a Non-compete Provision
There is a possibility that the seller of the company will start the exact business right after auctioning their entity. This is okay but what if the location of the new business poses direct competition to what you’ve bought? Failing or having a narrow non-compete provision with the seller is one of the pitfalls that people fall into when buying a business. A non-compete provision prohibits a seller from owning a business that is similar to what they are selling within a specific geographic scope. In some cases, it prohibits the seller from working in a similar industry to what they are selling.
- Not Conducting Due Diligence
A company may look lucrative on paper. It may seem to be making a lot of profit. It is easy to fall into the temptation of making an acquisition deal straight away after seeing the books of a company. But not everything that glitters is gold. Due diligence is an important aspect of the acquisition process. The process will reveal the true state of the company. You should contact a professional to help you with this procedure. These can be lawyers or even a CPA. Conducting due diligence will determine the true ownership of the business, the debt level, and the assets that the company owns. It will also help in determining whether the selling price is reasonable.
- Failing to Run a Lien Search
Lien refers to a creditor’s legal right over a company’s property. There is a need to establish that the company’s assets do not have a lien attachment at the time of making a purchase. An escrow agent can help with the lien search. Alternatively, a filing company can also provide the same service. Investing in a lien search protects buyers from inheriting creditors from the seller of the business.
- Ignoring the Commercial Lease Review Process
The commercial lease is among the biggest assets that a company can own. In most cases, these leases contain additional expenses that the buyer can miss. That is why it is necessary to hire a lawyer who specializes in commercial leases to clarify the key terms. Reviewing a commercial lease helps the buyer to know the true rental value of the property they intend to purchase. This is important in avoiding cases where the company falls into financial turmoil because of unforeseen expenses later on.
The Takeaway
Buying a company has a legal aspect to it. Most buyers are unaware of these legal issues and thus fall prey to unfavorable deals. Every buyer ought to engage a professional before making any purchase to understand the true scope of their investment. Some of these legal matters are fairly common so people can educate themselves by conducting research. However, this should not be an excuse to alienate the professionals when buying a company. Buyers are at a greater chance of avoiding the legal pitfalls if they engage those who have the expertise.