Purchasing a Limited Liability Company (LLC) can be a strategic move for entrepreneurs looking to acquire an established business. Proper due diligence, legal planning, and gaining a clear understanding of potential risks are important when it comes to pursuing a successful acquisition.
If you’re thinking about purchasing an LLC, know that the process is likely to be complicated. Thankfully, you don’t have to navigate it alone. When tackling each of the steps outlined below, you can benefit from experienced legal guidance simply by reaching out proactively. Here at Corey Szalai Law, PLLC, we can accompany you throughout each step of the closing process to answer all the questions you need and to ensure a smooth transaction.
Due diligence
Before committing to an LLC purchase, it is important to investigate the company’s financial, legal, and operational history. Request detailed financial statements, tax returns, and records of accounts receivable and payable, and review them closely. Work with your legal team to review contracts, leases, and any ongoing legal disputes or liabilities. A thorough examination helps uncover any red flags that could affect the business’s value and/or potential for success in the future.
It is also a good idea at this stage to prepare your monthly business projections for the next couple years. We advise projecting 1 to 2 years out from the purchase of the business. This is a crucial step that many buyers often forget to do. Analyzing the market and calculating accurate projections can help you figure out the working capital you will need to operate the business and prepare a proper budget.
Another important aspect of the due diligence period is to make sure that all permits and/or licenses are transferrable to you. If there are certifications required or licenses that do not transfer, then you might be buying a business that you cannot even operate initially. Speak with the seller and research Florida licenses to make sure that all licenses to operate the business are current and in good standing and that they can also be transferred to you.
LLCs are not liability-proof
While acquiring an LLC will mean that you’ll benefit from certain legal protections designed to safeguard your personal assets, it is certainly possible for an LLC to be affected by liabilities of its own. Unlike buying assets outright, purchasing an LLC typically means acquiring a business as a whole, including its debts and legal obligations. This may include outstanding loans, pending lawsuits, liens, or unpaid taxes. Ensure that you fully understand these liabilities and account for them in the purchase price or negotiate indemnity clauses with the seller to protect yourself.
Negotiate the purchase terms
Once you’ve examined the LLC’s market position, growth potential, assets, liabilities, and all other relevant factors, you need to work with an experienced lawyer to draft what is usually the first document in a transaction like this- either a letter of intent or, if you are ready to put everything in writing, a purchase agreement. Both of these agreements will essentially outline all terms of the sale including the purchase price, the structure of the deal (asset or stock purchase), how it is to be paid (seller financing, traditional financing, balloon loan, etc.), the closing date, the representations and warranties of the parties, etc. These documents are essential to the purchase and sale process as they can form the basis of the entire transaction, so making sure that they are done properly (for both parties) will provide the best form of protection.
Remember, there is likely no insurance that you will be purchasing for this transaction. Having an experienced lawyer by your side is your insurance. We help make sure that the seller gets to keep their money and you get to keep the business that you are actually purchasing. It’s a win for both parties.
Purchasing an LLC offers many opportunities but comes with potential risks. By understanding this reality – and seeking legal guidance accordingly – you can better ensure that the investment you’re hoping to make is a sound one. Contact Corey Szalai Law, PLLC today to discuss how we can help guide you through this confusing process to ensure a safe and smooth transaction so that you can start operating the business accordingly and hopefully turn the profit that you are looking for.