Top 7 Gotcha’s at Closing When Buying a Business

Avoiding Mistakes at Closing

The buying and selling of businesses can be an arduous process.  Both the buyer and seller are well served having a professional business broker that is seasoned and has a penchant for details.

In addition to the emotion of turning over the keys or leveraging one’s life savings for a new venture, there can be a lot of roadblocks along the way. I’ve listed the Top 7 issues of the 15 most common expressed from a survey of closing attorneys.

1. Landlord Approval — Begin to work with the landlord as soon as the purchase agreement is executed. Obtaining landlord approval of a lease can be a very long process and delay the closing date.
2. Inventory– The parties should agree upon how inventory will be handled prior to closing and what amount of inventory will be included in the purchase price. By agreeing in advance, it can help avoid further negotiations and disagreement about who is responsible for what at the closing table.
3. Franchise Businesses– Always obtain franchiser approval and past due royalty payments or amounts owed to the franchiser in advance of the closing. Without franchise approval, the buyer will not be able to operate the business.
4. Transfer of Vehicles and Other Assets — If vehicles or other assets are included, obtain original titles, payoffs and other required information, such as mileage, registration, expiration date, and VIN number prior to closing. The settlement statement can not be completed, nor can the vehicle be transferred, without the necessary information — especially Proof of Insurance.
5. Buyer and Seller Legal Status– Always verify the buyer’s and seller’s legal status, including whether they are a sole proprietor, partnership, or a corporate entity. It is a good idea to perform a 5 year look-back and ask “Have you ever been incorporated?”
6. Seller and Third-Party Financing — Many times seller financing is required to get the full asking price. Be sure the seller understands their note will be subordinate to any bank loan and may be put on hold for a few years especially when SBA financing is involved.
7. Gift Certificates — Understand Gift Certificate or other rebate options outstanding. The seller has already collected payment, however, there is some obligation of service that the buyer must perform without payment in many instances. If there is a large volume, this can be a deal breaker.

A good business broker will be the best counsel you’ve used in your business career. They will take the stress of managing these details off the buyer and seller so that they can focus on the most important issues such as customer service and business plan development.