Buying a business can bring considerable advantages, compared to starting one. This is especially the case for LLCs, a type of business entity that protects its owner’s personal assets in the event of debt or other liabilities and offers specific taxation benefits. Furthermore, by purchasing an established LLC, you will have access to an existing customer base and own a business that already has brand recognition. With this, you will be able to receive immediate returns and grow your business operations faster.
But how do you buy an LLC? In this article, we explain to you what is the best process to buy a Limited Liability Company, so you can start this new business venture at minimum risk and with the confidence that you are compliant with the law.
1. Find a business to buy
You can start by gathering information in your local network. Identify an LLC that is available for purchase in your city or you can look for options in the Illinois Chamber of Commerce (https://www.ilchamber.org/) or the chamber of commerce from the state you want to locate in.
Business newspapers and magazines may be a great source of results. You can also search for companies to buy from online, or contact a business broker that will search for a deal that fits your business objectives.
Where to find businesses for sale
- Local chambers of commerce
- Online business marketplaces, such as bizbuysell.com
- Communities of business intermediaries, such as IBBA (ibba.org)
- Business journals and newspapers
- Trade associations
- Asking around in your target city
2. Begin initial discussions
Once you have decided which LLC to buy, you can start the informal negotiations with the seller. Make sure that you are negotiating with someone who has full permission to do so, which is information that you can find in the Articles of Organization of the LLC.
At this point, the buyer’s objective is to collect as much information to make an informed decision on whether to continue with the negotiation.
At the initial negotiations, the buyer and seller will talk about the viability of the deal, and gauge the interest of the other parties, and the seller may even provide financial information.
During this phase, the seller may ask the buyer to sign a non-disclosure agreement (NDA), especially when sharing information related to finances. An NDA is a confidentiality agreement that prohibits you from disclosing sensitive information with others than your attorney or financial advisor. Similarly, the seller can ask the purchaser for some financial information to verify they can afford to buy the business.
If the seller is represented by a business broker, then the broker may help the discussions and act as an intermediary between the buyer and seller.
Valuation of the business also often happens during this stage. The seller will provide its EBITDA and the buyer will take this information to her accountant to see if the financial calculation adds up. Based on the numbers, the buyer, and seller will agree on a tentative purchase price.
3. Sign the Letter of Intent
If the seller and the buyer want to continue with the LLC sale, the buyer will present a letter of intent (LOI). LOIs are meant to be non-binding and outline the basic terms of the deal.
The terms that can be found in the letter of intent are:
- Tentative purchase price
- The structure of the deal, which specifies the assets that are going to be acquired
- A prohibition for the seller to accept offers from other buyers
- Conditions the buyer insists on to move the deal forward
- Length and extent of due diligence
- Buyer’s right to access seller’s documents and financials
- Confidentiality clause
- Non-binding clause, to ensure the document is not legally enforceable
- Timeline or expiration date for the LOI
Although LOIs are intended to be non-binding, they should be skillfully written to make sure that they are not legally enforceable. If it’s not written properly, it could still be a binding contract. Also, as a practical matter, just because the LOI is non-binding regarding whether the sale will proceed, it should still be taken seriously.
As we explain in this blog post about LOIs, the terms of the LOI do typically make their way into the final purchase agreement and are the backbone of the negotiation.
The best practice is to involve a business acquisition attorney from this step to ensure the Letter of Intent is written in the most beneficial terms for the buyer.
4. Conduct due diligence
The commercial due diligence process consists of an inspection of the business. In this part of the business acquisition, the buyer will have an in-depth insight into the financial health and potential liabilities of the target business, making sure the seller is up to code, if applicable.
This process starts with the buyer’s attorney drafting a due-diligence checklist and sending it to the seller. This checklist will consist of a long list of documents that the seller should turn over to the buyer for review.
What to look for before buying an LLC
Some key documents and information that you want to carefully review are:
- Articles of Organization
- LLC Operating Agreement
- Business licenses
- Real estate leases
- Current contracts
- Employee contracts
- Judgments/liens
- Patents and Trademarks
- Licenses
The buyer should also have an accountant review the financial health of the seller’s business as well to ensure the tax returns, financial statements, and bank accounts are in order. Similarly, the business attorney will verify there are no lawsuits or legal issues that the target business is liable.
This process could take 2–6 months depending on how big the sale is. For this reason, it is a good idea to hire a lawyer, an accountant, and the relevant professionals that will help you make an informed business acquisition.
5. Purchase agreement and closing
At the tail end of due diligence, the buyer’s attorney writes up the purchase agreement. The purchase agreement is a binding contract that outlines the terms of the transaction in more detail, including clarifying all the representations, warranties, and contingencies.
These terms are often drawn from the findings from the due diligence and negotiations of the buyer and seller. Here, both the buyer’s and the seller’s lawyer will go back and forth and further negotiate the deal, and there may be multiple rounds of the purchase agreement.
What to include in the purchase agreement
The purchase agreement will include all the relevant information about the business sale, which includes:
- The name of the parties
- Purchase price
- The scope of the purchase
- Closing date
- Terms of payment
- Contingencies, warranties, covenants, representations, and remedies
- What happens at the closing and after the agreement closes.
There may also be other contracts that need to be signed, such as a non-compete agreement, which will ensure the seller and the buyer does not take away customers from the new owner.
Closing
Similar to real estate closings, the buyer and seller set a date for when money and deliverables are exchanged. The buyer will send the money and the seller will deliver certain transfer documents such as assignment and assumption agreements, bills of sale, assignment of stock, intellectual property assignment, and whatever else is necessary. Sometimes the signing of the purchase agreement and the closing happen at the same.
After purchasing the LLC, you may need to notify your state about the change in ownership.
A business acquisition is a complex process that, if not conducted properly, can bring liabilities to both parties. An accountant and a business attorney can help you make an informed purchase decision, protect you from liability and have a smooth acquisition.