Buying a business: closing the acquisition part 2

Watch out for potential deal killers at closing

The deal killers

In our last article we had completed due diligence on our desired business and our lawyer was drafting the papers to close the acquisition. Included are a lease assignment or new lease, any lender-required documentation, a franchise agreement —if the business we are purchasing is a franchise, and any assignments of capital or operating leases on vehicles and equipment.

To put this documentation in place we will have to meet with the landlord, the lender, the franchisor (if applicable), and the vehicles and equipment lease(s) owner. We will also have to participate in the taking of inventory at closing.

Any of these areas of activity can kill our deal.

Satisfying the landlord

Even in a share purchase with an existing lease in place, a change of control often requires landlord approval.

In order to have the landlord approve an assignment of the existing lease or create a new lease you will have to convince the landlord that you are credit worthy and that the business you are purchasing will prosper under your management. You will have to provide a resume highlighting your experience and skills, a net worth statement and, probably, the business plan you have developed for the business you are purchasing. The landlord will likely require a personal guarantee of the lease obligations.

Armed with a solid resume, net worth statement and business plan, and accompanied by the seller and your business broker, you should meet with the landlord well in advance of closing to request the lease assignment and to let them get comfortable with you as the new owner.

The landlord may require you to pay their legal costs for the transaction.

Satisfying the lender

Your lender provided a term sheet or approval in principle for your financing prior to your lawyer beginning the drafting process. They will now require copies of the agreement of purchase and sale, the lease assignment, your updated business plan, and all necessary legal documentation prior to disbursement, including an executed copy of the franchise agreement if you are purchasing a franchise.

The lender typically needs all of this in advance of closing as it will be sent to their head office for approval before assigning the funds. Allow sufficient time for the lender to go through this process ahead of your closing date.

At closing, the lender will advance funds to your lawyer with the requirement that all closing documentation be properly executed prior to the funds release. Removal of liens can slow the closing process—during pre-closing searches we sometimes find old liens, some that can only be removed with payments out of the closing proceeds. It is wise to do the searches early in the process even if a second set of searches is needed at closing.

Satisfying the franchisor

If the business you are purchasing is a franchise, you will have already met with the franchisor and been disclosed and approved by them prior to starting the closing process. You may have been required to successfully complete their training program. It is not uncommon for the franchisor to require payment of a transfer fee and payment of any outstanding obligations of the previous owner. Make sure these are sorted out well in advance of closing.

Taking inventory

Just prior to closing, you and the seller should do a walk-through of the business to ensure that all the furniture, fixtures and equipment included in the sale are present and in good working order. This is also when you will take inventory.

While it is sometimes contracted to a firm who specializes in taking inventory, more often this task is done by the buyer, the seller, the business broker, and friends and/or staff.

Inventory taking can be very time consuming. I recall selling a computer sales and repair business where we began taking inventory at 4 p.m. the afternoon prior to closing. We finished at 8 the following morning. By then, the purchaser had gone home to bed and requested that we simply tell him the value when we met with the lawyer to close at 10 that morning.

Your business broker will have experience in taking inventory—involve them in developing the plan.

As the purchaser, you want to ensure that the inventory you are purchasing is current and salable and that you are paying for it at cost (which includes shipping costs). Having the broker working with you during inventory taking can help resolve any associated conflicts that may develop between you and the seller.

In our next article we will look at some of the often forgotten logistical issues that you need to deal with prior to closing.

Looking for more information on buying or selling a business? Check out our many resources on www.sunbeltcanada.com

And for ongoing tips on buying, building or selling a business, be sure to sign up for our monthly newsletter. You can see a sample of the newsletter here.