{"id":7835,"date":"2025-10-02T11:24:37","date_gmt":"2025-10-02T16:24:37","guid":{"rendered":"https:\/\/www.bgs.com\/blog\/?p=7835"},"modified":"2025-10-02T11:24:39","modified_gmt":"2025-10-02T16:24:39","slug":"buying-an-operating-business-step-1-know-your-seller-know-the-process","status":"publish","type":"post","link":"https:\/\/www.bgs.com\/blog\/2025\/10\/02\/buying-an-operating-business-step-1-know-your-seller-know-the-process\/","title":{"rendered":"Buying an Operating Business \u2013 Step 1. Know Your Seller, Know the Process."},"content":{"rendered":"\n

A large portion of my day is spent working on transactions for clients who are either buying a business or selling a business. Having walked so many people through this process over the last three decades, I have a pretty well-developed system for explaining how transactions typically work, what issues to watch for, and best practices. This blog is the FIRST<\/strong> of three addressing the sales and acquisition process for private transactions. For simplicity, I will address the process from the buyer\u2019s perspective. I will also assume that the companies involved are corporations, although of course they could just as easily be limited liability companies, in which case the information will be the same, albeit with different terms.<\/p>\n\n\n\n

While the topics covered in this blog and the statements made apply in the majority of transactions, every transaction is different. Do not rely on this blog when undertaking a transaction; that should be done in connection with legal, tax, and other professionals.<\/p>\n\n\n\n

A purchase of a business can be accomplished by buying the ownership interests in the business (here, buying the stock) or buying the assets. There is less risk for a buyer in an asset purchase, although the seller may prefer to sell stock in order to minimize his\/her tax liability arising from the sale. The final decision on the structure of the transaction will be made based on these and other considerations, and should involve the tax and legal professionals.<\/p>\n\n\n\n

Typical buyers can be:<\/h2>\n\n\n\n
  1. An existing owner(s) buying out a departing owner. This can be done as a stock sale or as a redemption by the company.<\/li>
  2. An existing employee or group of employees buying the stock or assets of the company.<\/li>
  3. A significant customer that steps in to buy all or some of the business.<\/li>
  4. A competitor that buys the assets of the business.<\/li>
  5. An unrelated third party, found through word of mouth or by using a business broker.<\/li><\/ol>\n\n\n\n

    When the client contacts me, it is almost always after it has identified a company it wishes to purchase. Some small amount of investigation (called \u201cdue diligence\u201d) will have been done, and the buyer and seller will have discussed a preliminary price or range of purchase price. At my first meeting with the client, we will discuss the process in general and the specific tasks I recommend with respect to the particular transaction. The type of industry involved will impact the transaction investigations and terms. <\/p>\n\n\n\n

    What does the overall process look like?<\/h2>\n\n\n\n
    1. The seller and buyer sign a Non-Disclosure Agreement, and the seller shares financial and perhaps some other information. Specific customer names and other proprietary information is generally not shared at this stage.<\/li>
    2. An approximate price is agreed on, as are the types of adjustments that may apply to that price, and contingencies to the deal. A Letter of Intent (LOI) is signed, setting out those terms which have been tentatively agreed upon. An LOI is not binding, except as to the confidentiality provisions and the exclusivity period. An exclusivity period is one wherein the seller agrees not to entertain other offers. That period is generally 60 to 90 days.<\/li>
    3. Once the LOI has been signed, the parties start the due diligence process in earnest. The financial and tax team will review the seller\u2019s financial records, advise on earnings, advise on tax impact, and work with the attorneys on the purchase agreement. At the same time that due diligence is conducted, your legal team will be engaged to draft the purchase agreement. This is a long process, and the topic of blog #2.<\/li>
    4. Closing! Some purchase agreements are signed at closing, while some are signed prior to closing. This is the topic of blog #3.<\/li>
    5. Post-closing matters.<\/li><\/ol>\n\n\n\n

      How do we get to know the seller?<\/h2>\n\n\n\n

      In the case where the buyer is related to the seller\u2019s business in one way or another (as an owner, employee, customer, or competitor), the buyer will already know a fair amount of information about the seller\u2019s business. What may not be known is information about the owners of the business. For instance, consider a customer that wants to buy the fictitious Johnson Supplies. It knows what Johnson Supplies sells, but it may not know much about the people that own the company, or the financial condition of the company. When I am contacted by a client on a sale, I recommend and take these initial steps:<\/p>\n\n\n\n

      1. Check the status of the company with the Secretary of State for the state of formation. If the company is operating in MN, that would be the MN Secretary of State. This will help us determine if the company is domiciled in MN or another state, which also tells us where else we should look for information.<\/li>
      2. Once we know the state(s) involved, we order UCC searches. A UCC-1 is a public filing made by a secured creditor that lets the public know that that creditor claims a security interest in assets of the seller. If those liens are good (sometimes they are old and should be released), then the buyer needs to have those released in order to buy the company.<\/li>
      3. We also order tax lien, judgement lien, and litigation searches. Again, these searches will give us information about the seller and its business. We will do the search on the imaginary Johnson Supplies company and all of its owners. We want to know if there are tax liens\u2014that indicates an issue with operations. And is the seller being sued? If the case has been filed in court, we may be able to review the complaint.<\/li><\/ol>\n\n\n\n

        These initial steps complement the due diligence that will be done as a formal part of the process once the LOI is signed and the purchase agreement is in process. Our firm works with the accounting team to create a list of due diligence items and will review the responses with the buy side group as they are received. As information is gathered and concerns are noted, the purchase agreement will be modified as needed. Those modifications may include an increased escrow account, specific actions that the seller must take before closing, and enhanced indemnifications. The better we know the seller and its business, the better we can protect the buyer and ensure it receives the business it bargained for.<\/p>\n\n\n\n

        Watch for blog #2, which will cover the purchase agreement process, and blog #3, which will cover closing and post-closing matters.<\/p>\n","protected":false},"excerpt":{"rendered":"

        A large portion of my day is spent working on transactions for clients who are either buying a business or selling a business. Having walked so many people through this process over the last three decades, I have a pretty well-developed system for explaining how transactions typically work, what issues to watch for, and best practices. This blog is the FIRST of three addressing the sales and acquisition process for private transactions. For simplicity, I will address the process from the buyer\u2019s perspective. I will also assume that the companies involved are corporations, although of course they could just as easily be limited liability companies, in which case the information will be the same, albeit with different terms. While the topics covered in this blog and the statements made apply in the majority of transactions, every transaction is different. Do not rely on this blog when undertaking a transaction; that should be done in connection with legal, tax, and other professionals. A purchase of a business can be accomplished by buying the ownership interests in the business (here, buying the stock) or buying the assets. There is less risk for a buyer in an asset purchase, although the seller may prefer to sell stock in order to minimize his\/her tax liability arising from the sale….<\/p>\n","protected":false},"author":14,"featured_media":7838,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[17],"tags":[73,122,71,249,109],"coauthors":[54],"yoast_head":"\nBuying a Business: Step 1. Know Your Seller & the Process<\/title>\n<meta name=\"description\" content=\"When buying an operating business, you need to know your seller and understand the buying process. 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