Last Updated on March 9, 2023 by lukesguide
Whether you use a broker or buy through an online marketplace, buying a business can be a complex process and you have probably asked yourself whether you need to hire a lawyer when purchasing a business.
If you are looking for an answer to the question “do I need a lawyer to buy a business?”, you have come to the right place.
In this article, we will cover what the legal requirements are to buy a business, what legal risks are associated with buying a business, the reasons for hiring a lawyer to help you buy a business, and much more!
If you already know you need a lawyer, feel free to skip straight to our review of the best online legal services to start your search.
What Are The Legal Requirements For Buying A Business?
The key legal requirements for buying a business will vary depending on several factors, including the location of the business, the industry, and the type of business being acquired.
Here are some of the key legal requirements that would apply to most business purchases:
Contracts and Agreements
The sale and purchase of a business usually involve the execution of various legal documents, including the following:
- terms sheet
- asset purchase agreement or stock purchase agreement
- non-disclosure agreement
- non-compete agreement
- employment agreements
- lease agreements
- financing agreement
- intellectual property assignment agreement
- transition services agreement
Any legal documents used in the purchase of a business should be drafted and/or reviewed by a lawyer to ensure that they have been prepared with your best interests in mind and are legally binding.
Regulatory and Compliance
Although it depends on the type of business being purchased and its location, there are often regulatory and compliance matters that need to be considered when buying a business.
It is essential to consider if there are any government or regulatory approvals required by either the buyer or the seller before the business can change hands.
For example, some businesses require licenses or authorizations in order to operate. These licenses and approvals are typically issued by a government body and a transfer of the relevant license or approval to another person will usually require government approval.
A lawyer can help you identify any required approvals and also help obtain the approval if required.
Tax Obligations
In most countries, the sale of a business will trigger a tax obligation for the buyer or seller, or both.
Before you sign on the dotted line, you should check with a specialist taxation lawyer and an accountant whether you will be required to pay any taxes or duties when buying the business.
An experienced taxation lawyer can advise you on the specifics of any tax payable, including the amount, the due date, and any possible concessions or exemptions that may be available to you.
What Are The Legal Risks Of Buying A Business?
Like any transaction, there are legal risks associated with buying a business. While these risks cannot be completely removed no matter how hard you try, a lawyer can help mitigate these risks through a process called due diligence.
Depending on the type of business and the industry within which it operates, a legal due diligence review can cover a broad range of legal risks.
Some of the more common risks that a due diligence exercise will focus on include:
Legal Title and Ownership
While a business owner may tell you that they ‘own’ the business and its assets, it is important to confirm this before entering into an agreement to purchase the business.
In particular, it is important to make sure that the party listed as the “seller” under the sale agreement is the person or entity that actually owns the business and its assets (including any intangibles such as intellectual property).
In all business sales, there is a potential risk that an unrelated third party may have an interest in the business and the assets.
These third-party interests usually come about when the business owner borrows money and the lender takes security over the business and assets as collateral.
It is important to investigate the ownership of the business carefully and ensure that the seller has the legal right to sell the business to you without any encumbrance. If there are encumbrances, these will need to be released before the completion of the transaction to avoid any issues for the buyer down the road.
Liabilities
If you are buying a company, it is important to understand that all liabilities remain with the company even after it is sold (unless they have been discharged).
This means that when you buy a company, you are assuming any obligations a company has to repay any debts it has incurred.
It is important that you investigate what liabilities a company has and how those liabilities will be treated when the business is sold.
For example, will the liabilities be discharged, or if they remain with the company, will the purchase price for the business be reduced accordingly to account for those debts?
A lawyer can help you first identify any liabilities a company has and second, guide you on how best to deal with them.
Regulatory and Compliance
Similar to the treatment of liabilities of a company, any regulatory action or compliance issues will attach themselves to a company.
This means that even if there is a change in ownership of the company, any residual risk relating to regulatory or compliance matters remains with the company and can have a material impact on the value of the business.
Such issues may include an ongoing regulatory investigation involving the company that concludes after the business has been sold.
If the investigation results in a penalty or fine, the company will most likely still be liable to pay, even though there is a new owner.
Such an outcome could be devastating for an incoming buyer of a business and it is crucial that any regulatory and compliance issues are identified before agreeing to purchase a business.
A lawyer is well placed to advise you on such issues if they arise and what the risk is to the business.
What Are The Reasons For Hiring A Lawyer When Buying A Business?
The overarching reason most people hire a lawyer when buying a business is for peace of mind. An expert lawyer who is experienced in buying businesses will know things that you won’t and can provide guidance when prickly legal issues arise.
There are several other reasons for hiring a lawyer when buying a business and we summarize them below.
Due Diligence
As mentioned earlier in this article, the due diligence process is incredibly important for identifying any issues and/or risks with a particular business.
Legal due diligence can be a complex and time-consuming process and is often best left up to the professionals.
Negotiation
An experienced business sale lawyer can help guide you during negotiations with the seller of a business and their own advisors.
Negotiations can be stressful and it helps to have an experienced lawyer on your side who can approach the negotiations with a cool, level head.
Contracts And Agreements
Ensuring that any legal contracts and agreements you enter into are in your best interests is crucial when buying a business.
Even a minor change in language can have a significant impact on the way an agreement is interpreted so it makes sense that the drafting is left to a lawyer who specializes in business sales.
What Kind Of Lawyer Do I Need To Buy A Business?
In most cases, you need an experienced M&A or corporate advisory lawyer to advise you when buying a business.
Lawyers that specialize in M&A and corporate advisory are experts when it comes to business sales.
When you are on the lookout for a lawyer, it is important that you take the time to assess their credentials and relevant experience before engaging them.
How Much Are Lawyer Fees For Buying A Business?
The cost of hiring a lawyer when buying a business can vary widely and could be as little as a few thousand dollars or cost hundreds of thousands of dollars.
The exact cost will depend on several factors, including the complexity of the transaction, the scope of services to be provided, the experience and reputation of the lawyer, and the geographic location of the lawyer’s practice.
Some lawyers may charge a flat fee for their services, while others may charge an hourly rate or a percentage of the purchase price (also called a success fee).
It’s important to discuss fees with potential lawyers upfront and to get a clear understanding of what services are included in their fees. Some lawyers may offer a free initial consultation, during which they can provide an estimate of their fees.
In addition to lawyer fees, there may be other costs associated with buying a business, such as filing fees, appraisal fees, and due diligence costs. These should also be taken into account when budgeting for the transaction.
Wrap Up
Buying an asset such as a business can be a costly exercise and it makes sense to hire a lawyer to help protect your interests during the sale process and beyond.
Other than a lawyer, you may also want to hire other professionals to help including a valuation expert and an accountant.
Do you need to hire a lawyer to help you buy a business? Or have you bought a business already and can share your experience with us?
Let us know in the comments!
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