So there are three steps in how to acquire a business. The first is how you’re going to create your entity to acquire that business. The second step is the due diligence process, which is where clients get to investigate the business they’re going to buy and look at the books and records and contracts and stuff like that. And the third step is just the closing process, which is where most clients will hire legal counsel to help them close the transaction.
I’m Julian Casal. I’m the managing partner at Casal & Moreno, P.A., and I handle commercial transactions and structuring.
When you’re thinking about acquiring a business, most clients are very excited and they want to move forward quickly with the process. It’s best to hire and attorney when you’re going to enter into a contract with a seller so the attorney can review the contract and guide you through each step of the way from a contract to a closing.
There are plenty of potential pitfalls a client could come across if a client tried to do these things by themselves. A simple example is something as basic as setting up and choosing the proper entity.
How to Acquire a Business: Example #1
We had a client who hired us a year after they acquired their business because they ended up paying tax twice—income taxes—because they set up as a corporation and they didn’t file the proper paperwork to go through a pass-through entity for a small partnership. Had they come to us with questions about how to acquire a business, they wouldn’t have had as much trouble as they did. This was a very small retail business that they acquired that year. And when you set up as a corporation, you pay taxes at the corporate level and then you pay income tax at the personal level. So they hired us after the fact. We set them up as a limited liability company pass-through to pay taxes one time. However, they felt a little pain in the wallet because they had to pay us double the fees—to close the initial corporation and then open the new entity.
How to Acquire a Business: Example #2
We had another retail business that we represented. The clients hired us to close a transaction. When we were going to close the transaction, we realized the vendor contracts were expiring and the seller had outstanding debts with those vendors, which were delaying deliveries of the inventory for the business. So we had to take a step back, help the client negotiate extensions on the contracts and make sure the seller liquidated all their debts so this new client wouldn’t assume somebody else’s debts and end up paying all of that money to the vendor for prior purchases.
So the potential consequences of doing it yourself is that when you go back to fix the problem, whether it be a problem at the beginning with the corporate structure and you have to close one entity and open another entity or if it’s a contract that was not reviewed correctly and you have to renegotiate the contract, you’re now paying a professional to do it twice because they have to fix the problem and then create the new, correct process.
At Casal & Moreno, we can help the client, first, negotiate the contract, second, guide them through the due diligence process to make sure they don’t have any contractual issues, third, help them set up the correct structure for their business, and fourth, help them close in a way that is very cost-effective for the client. Contact us if you want to learn more about how to acquire a business.