Are you thinking about buying a business for sale in Arizona?
You might be wondering, what should I do when buying a business? Hiring legal counsel to represent your interests in the negotiation and purchase of an Arizona business for sale can be a critical factor in avoiding costly oversights post-closing.
Keep reading to learn the important factors you need to consider before buying an Arizona business for sale.
Never Close Over Important Diligence
It’s easy to get swept up in the excitement of buying a business. As the deal progresses, and you are conducting important due diligence (reviewing the potential target’s financials and historical business operations), you may be in a rush to get through the process and become a new business owner.
Who wouldn’t be excited?
In addition, you will undoubtedly get pressure to keep things moving quickly by the seller, investment banker or broker — or all of the above. Even though everyone is excited, it’s important to not to race to the finish line and immediately stick your head in the sand.
One example is inventory.
If the business for sale has a significant amount of inventory that’s important to day-to-day operations (trucks, components, raw materials, etc.), it’s critical that you, as the buyer, audit the inventory.
Let’s say you skip the audit and close on the business without ever seeing the inventory. One week after closing, you visit the target’s principal place of business only to find that the inventory listed in the diligence doesn’t match the amount of inventory on hand or it’s broken down and unusable. Now what?
You must rely on the purchase agreement you negotiated to determine if you’re protected by the seller’s representations and warranties, which leads us perfectly into the next topic.
Don’t Rely on a Purchase Agreement Form Document
Form documents, whether they’re supplied to you from the seller, given to the parties by a broker, or simply found on the Internet, are never sufficient to protect your interests. These form documents are typically drafted to appease both the buyer and seller simultaneously, which means neither party’s interests are adequately addressed.
Let’s turn back to the inventory example.
If the purchase agreement form document is not drafted in such a way that the bad inventory would constitute a breach in the seller’s reps and warranties and/or there’s no escrow in place to make the necessary adjustments to the purchase price, you might be left completely unprotected.
This means you’re reaching out to the seller with threats to give back some of the money you already paid them.
Not a good position to be in.
Representation and Warranty Insurance May Not Cover Your Breach
Representation and warranty insurance (R&W insurance) is all the rage these days. It’s a form of insurance that can be underwritten as “seller side” or “buyer side” protecting, in either instance, against a seller’s breach of its representations warranties.
Representations and warranties are, in essence, an assertion of fact given by one party to the other and relied upon by both to enter into a mutual agreement. For example: the seller, in selling its business, would represent and warrant that no material changes to its business have occurred or will occur prior to closing.
While R&W insurance can provide some great coverage in the event the seller has not be truthful in making its representations and warranties, it’s important to remember that the coverage is not limitless.
The underwriting process is detailed and aims to find high risk areas of the transaction that will be written into the policy as exclusions such an environmental and tax liabilities. In addition, R&W insurance typically doesn’t cover known breaches, covenants and purchase price adjustments.
Whether you should consider purchasing R&W insurance when acquiring an Arizona business is an important decision. If you elect tp purchase, a lawyer can help you through the detailed underwriting process
Are you buying a business in Arizona and need legal guidance?
Nocturnal Legal can help you navigate and successfully buy an Arizona business while ensuring your interests are protected and mitigating future liability. We utilize flat fees to eliminate surprise legal costs and to give you peace of mind.