Starting your own business? Why incorporate if you can buy a business?
When you start your business, you normally have two options:
- to open a new business; or
- to buy an existing business.
You should certainly weigh their pros and cons.
Buing a Business
Acquiring a business may, in particular, be easier and more efficient than starting a business from scratch. That is why so many businesses resort to mergers and acquisitions (M&A). Common in any industry, the M&A deals are a great way to launch, expand, or diversify your business.
To avoid any confusion, a bussines purchase differs from a business franchise. The latter merely provides the right to use (rather than own) business framework belonging to others. Accordingly, selling a business (e.g., online business for sale) usually means selling a company (e.g., the company holding the online business). Franchise for sale, in contrast, belongs to other business opportunities.
Unlike incorporating, buying a business allows you to use all of the licenses, permits, and other authorizations that the target company enjoys. You can also employ all of its assets right away. Your business thus constitutes a going concern. So, you can be up and running fast.
How to buy a business in the U.S.? What should you do from a legal perspective?
Acquiring a business necessitates certain legal actions.
Business purchase usually includes the following steps:
- Letter of intent (LOI), which is a declaration by the seller and buyer on their prospective deal;
- Sale-and-purchase agreement (SPA), which is a contract formalizing either a share deal or an asset deal and normally containing relevant conditions precedent, representations and warranties, indemnities, and other terms and conditions;
- Legal due diligence (LDD), which is a review, analysis, and assessment of legal risks and development of solutions to them; and
- Closing, which is a documented exchange of title for money, with a possible adjustment of purchase price depending on the due diligence results.
The second and third steps above may swap their positions, depending on the deal structure outlined in the LOI. In other words, the LDD may precede the conclusion of the SPA. That is, in fact, often the case in practice. On the other hand, if the buyer conducts a preliminary review on the target, then the LDD may follow and adjust the SPA. Regardless of their order, both steps are crucial.
As you may appreciate, the LOI, SPA, LDD, and closing of M&A transactions take plenty of legal research, analysis, and writing.
This is a nutshell of how to buy a business in the U.S. The above business acquitision steps apply regardless of wehther you are buying a small, medium, or large business. By the way, the same steps usually apply not only in the U.S., but also in other countries.
What if you prefer not to buy a company, but rather to found your own enterprise? Then watch our webinar (in Russian language) on how to start a business in the U.S.
If you already own a business, learn how to defend your company against a hostile takeover.
Take care of your M&A deal!