Part 2: Seize Your Business Empire - Due Diligence & Structuring the Deal

Some sellers would be like, oh yeah, I'm going to play golf the rest of my life. I'm out of here. We don't need to sign a non compete. I don't care. Trust me, six months from now, this guy or gal, they're going to be bored out of their gourd.

It's kind of like buying a car. There needs to be some gas in the tank for me to get the damn thing home. I don't just buy the business and there's not a cent in there. I just cashed you out. I just gave you a bunch of money. Do I have at least a month or two of working capital in the business account?

I hate the quote that's out there. Three out of five small businesses end in like less than five years. That businesses fail all the time. No, my business owners, they pivot. The business is not going to look the same three years from now. And that's okay. That's what business is about.

Welcome everyone to the Main Street Business podcast. This is Matt Sorenson, joined by the great and powerful Mark J. Kohler and we are on buying a business. Part do, part do.

Wow, you're going to throw it on another language. Okay. Yeah, part dose. All right. I don't know what language you were talking. I guess a little French.

Wow, it's very sophisticated.

Yeah, you are. Folks, this is going to be a good one. We're going to hit a bunch of topics here and like the first part, we're going to riff back and forth, see where we go with this because there's just so much. So in this short video we're going to try to cover things like the tax issue, the legal issues, how you should structure it, what's that purchase agreement look like, what entity you should choose, what type of financing you might use. We're just going to kind of riff again on a variety of topics that I think are just really important in this chunky, meaty structure, legal, tax.

Yeah. And we are two business and tax lawyers. We've helped clients buy businesses. We have attorneys in our office helping a client every week buy or sell a business. We have really good perspective on this. And the first part of this is about structuring the deal. How should I structure the offer? How should I value that business? What considerations should I have before even buying a business? Period. Now we're assuming you've made that determination, you've made an offer and now you got to really structure the deal and pull it off. What does that look like? This is a lot of Times, unfortunately, when clients come to us, we'd like them to come before they start negotiating. There's a lot of times when clients come to us. This is where a lawyer is critical in making sure you get this done right?

Totally. And this is we. If you haven't watched part one, you have to because there's a lot that leads up to this moment. We are now transitioning from the letter of intent to the formal purchase contract and we're going to talk about a couple options there. Let me just say what you don't do. I remember there's one client, they came in and they were so upset that they had bought this business and not received everything and felt like they got ripped off. It was kind of a, a newspaper magazine advertisement business and they were just so over the top upset. And I'm like, okay, okay, come in. And this was back in the day where they wanted to come in in person. Good. 10 years ago. And I said, okay, bring your contract in. And they were kind of paused and I was like, okay, whatever. That was an odd response. But anyway, they show up and I am not kidding you, Matt. They had one page and I was like, okay, one page contract. It was one paragraph at the top and it was the whole deal. I will buy your business for, you know, it was like 50 grand, la la la. And you'll give us this. And I go, okay. Was this an email? What was it? No, that's the whole deal. Yeah, it was one paragraph and they wonder why it was blowing up. Oh my gosh. That's what you don't do, people.

Yeah. And let me say sometimes the outcome of that one paragraph tells us what the process looked like and what these people actually talked about in doing the deal. Because I can tell you they didn't talk about what's included, what's not included. Is there a non solicitation agreement or a non compete agreement for the seller leaving the business? Did they talk about allocating the purchase price? Did they talk about whether this is an asset purchase or a stock purchase? Did they talk about which entity this is going to be set up in? Like this is the stuff you need to decide and what's going to go into this agreement? And, and that is the process of. That is what creates less conflict, less disagreement when you're on the other side of this.

Okay. And I think the way we. What do you think about this? Let's talk about the two options in general. We could do a full half day seminar on this piece. Again, just this piece. But let's talk about the two contract options and then maybe we riff on what you should have in that contract. And everybody, you can take notes and just remember to bring these up with your attorney. Yeah. So do you want to describe the two contracts?

Yeah, let's hit the first two. You're now the critical option of asset purchase or stock purchase. And what that means is am I buying the assets of your business like the customer list, the goodwill, the service agreements or whatever the contracts that they might have with existing customers, or am I buying the actual company like I'm buying the stock of your corporation or the membership units in your llc? Now typically for small businesses, we like asset purchases. Bigger deals might have a stock purchase agreement where you want some of the things the company owns. It might have a lot of pieces to it.

It's more of a Wall street type transaction.

But if we're not talking about $100 million deal or something like that, we're going asset purchase typically. And that is there's a number of reasons for that.

Yeah, I think the first reason is from the buyer perspective is going to come down to tax issues. There's several. But the when we're going to again riff on what should be in this agreement and we can't hit it all but we'll do our best to give you some things to look out for. But the first issue is when you do an asset purchase agreement, you're able to allocate the dollars you're spending to inventory maybe a non compete goodwill equipment. And it's going to give you the ability to immediately deduct things from a depreciation standpoint in different ways. Some things you don't even get to deprec. So that allocation is very important. And let me just tell you, the seller has a very is very motivated to allocate them to things you don't want because they want capital gain treatment. They want to write things off on the sale very differently. So there's a competing issue there. And again this is often silent in the contract. And then the buyer goes and allocates it the way they want, the seller does what they want and the IRS is like. And then it becomes to be a litigated issue.

Yeah. And so in other words, you get more tax write offs and you can accelerate your depreciation expenses for the money you're putting out on that business when you do an asset purchase agreement if you get the allocation right. The other reason I like the asset purchase agreement is I'm not buying your liabilities. That's Part of the deal. Like I'm going to go set up a new entity, a new LLC or a new S Corp that I'm going to operate the business out of and that new entity is buying all of your assets, your LLC that you've had that you might have a pissed off customer from two years ago that it's going to pop their head up. If I do a stock purchase, I'm going to be responsible for that because I bought the company so the company liabilities go with it. So it's a lot cleaner to just buy in a, to do an asset purchase because I don't have to worry about the liabilities you have left with the seller.

I'm just laughing here because I know and I feel bad but I know someone is listening to this that has already signed a deal to buy someone's S Corp or LLC and you had no idea that the seller was doing this. To walk away from liability and get a great capital gain tax treatment and you are hosed. I am literally almost, I've told clients walk away from the deal and let's get into a fight on your money before you take this deal because it is that bad when you do that.

Yeah. And if you do a stock purchase, you're buying some of the stock in their corporation or membership in an llc. There's a couple things you can still do to try and protect yourself. One, we're going to put in the contract by the way, any liability that peak 6 head up before the I purchased this company, I'm coming after you. You're personally responsible for that. That's one thing. You can contract for what big companies do or when you're buying companies in the tens or hundreds of millions of dollars, you can actually buy something called reps and warranty insurance that says hey, if you represented something or you're warranty and this business doesn't have issues or liabilities and I get some claim against me as the new business owner, I, I can go make it against an insurance policy. Okay so. Or you can sometimes have money set aside. Maybe you did seller financing, you made them do some seller financing. So you have some money basically that you haven't paid them out yet. So there are some maybe workarounds around it but better off not even have the issue and have to worry about all these fail safes to just buy their damn assets. Let them have the liabilities.

Yeah. Now okay, again we could continue to talk about this distinction but we're going to leave it at but use the asset purchase agreement what you're going to do at this point is work with your lawyer to go, here's my letter of intent. We've got the basic framework. We've now agreed on a price, and still maybe you're working down the price through the due diligence phase, but you're going to start drafting this asset purchase agreement. You're going to give a copy to their side, they're going to give a copy to your side. Now, if you want to save money, let the seller do the first draft. Let their lawyer say, here's our first shot at the asset purchase agreement.

I like doing it.

Oh, no, no. I just said if you want to

save money in the short term, it'll cost you later.

Fair point, fair point, fair point. And a lot of times the seller's not going to let you draft it. They're going to come up. I would think most times the seller's going to come around, here's my contract. But whatever. I think again, you could get in the driver's seat real quick.

Yeah. If you're the buyer, present the offer. And the docs, I like that. I mean, sometimes you're going to split costs and obviously if they have a lawyer, they're going to have work together and it's going to be a, you know, a team effort, so to speak. But I think I like drafting it and controlling it because I'm with you as your lawyer. If we're representing you as the buyer, our law firm, you know, or anybody in this scenario, we want to dictate terms. And there's going to be a lot of stuff in there that a lot of sellers aren't just going to care about, and they might care about price more. And so as Mark said in the last part one, you can get price or terms. I'm going to get a lot more terms in my favor if I can control the drafting of the documents.

Totally.

Not that I'm trying to slip one past them or anything, but.

No, of course not, of course not. Of course not. Called a poison pill, but I love it. Totally agree. So you're going to start transitioning to this asset purchase agreement. You're going to start passing it back and forth between the seller's attorney, you and your attorney and trying to keep the cost down. I get it. We've done these for two or three grand. We've done them for 20 or 30 grand. The more time you want to spend in the mix, the more it's going to cost. So that's why I like having a buyer and seller. And we talked about this in part one. Just agreeing, let's get agreement because then we're not fighting with the lawyers as much. That's where it gets expensive. On the terms. All right, now let's just start saying what some of the things that should be in here. Yeah, I'll. You go first. Like.

Yeah, I think so. You're going to have these exhibits. So you have kind of like the asset purchase agreement says, hey, we're buying this business. You represent, everything's good in the business. And it really is what you've told me it is. And the financials you gave me are really accurate, yada, yada, yada. But then you have this, these exhibits that are really critical. And one of the first ones is assets included or excluded. And this is the one on your example you had of like the one paragraph. It's not clear what's included. You got to say what's included? Are there, is there any intellectual property? Are you getting the website? Maybe this is someone that has a couple different businesses or customers and you're only buying a certain part of it. You got to be clear about that. Is there a lease that's going to be involved that needs to be transferred? Is there equipment that needs to be transferred? Like we got to be very clear of what's included or what's excluded from this. Sometimes, particularly if these are personal, you know, individuals that have started a business themselves, they've got like quasi personal business assets like getting your computers and laptops. What stuff's included in this? Your camera, your equipment? I don't know.

Yeah, and this is where the fights start too. They're like, hey, I thought that kick ass F150 in the back was included. Well, that's mine. I'm going to keep that. Okay, well that's going to affect the purchase price again, I got to go

buy one of those.

Then that allocation of value is going to be reflected on that exhibit too. I'm buying this and this. And how much is it valued in the purchase price? And they may. Well, I'm not going to pay X if the boat, the rv, the four wheelers, the truck, everything you've been writing off in your business, that's not going with you. Okay, so this is where the rubber meets the road. And you're going to talk about this allocation right away. Get it on the table. You don't want this to be a 11th hour issue. Get that list out there right away. Yeah, okay. And I'm going to throw out something too. And Matt said the bulk of the agreement is the purchase price. And I'm going to say it now. The transition, which is part three, that's going to be the next video you're going to want to watch is how are we going to transition the business? How long is the seller going to stay on board? Who's going with the business? What's the timeline? You're going to want to talk about that very specifically in here. I'm just going to use the word expectations. Talk about what you expect explicitly, because I promise you, what you think you're getting and the service of the seller in the transition is going to be very different than what they're thinking. Now, we're going to talk about what to ask for in part three, but this is the agreement, your document you're going to put it in.

Yeah. And I think one, one thing we can't overlook here is the funding. Right. Because that's going to be a big part of it. And you really can't come down to three options of how you're going to fund the purchase for the business. You're going to throw in some cash. There's going to be a loan, which could be an SBA loan. Get up to 10 million on those and seller financing. And as we said in the first video, if you haven't caught that yet, is it's critical to do some seller financing. Most small businesses have some component of seller financing where that's 10% or 50% or even 100%. And as a buyer, you want that because I want to make sure that I've got this seller aligned with me, wanting me to have success. And also if they'd misrepresented something unfairly or I got their number one customer, that leaves on day two, right. When I take over the business and I'm like, this is worth half of what it was before. I've got some money that I didn't pay out yet that I can be like, oh, I'm not paying you the rest of this. Okay, I got some over their head. And so not that you, hopefully we don't want to use this, but it's nice to have this little protection. So expect some seller financing. When you're buying a small business that is very common, the seller is going to get paid out on some of it over time.

And I know you want to talk a little bit more about financing, but with this list, I will say too, is the buy the non compete. This is where in some instances you don't care what the seller does after you close. But in some instances the seller going out and competing on day two would be disastrous. And so you're going to want to talk about that. What does the seller want or expecting? And do not get bamboozled here, that's a legal term for a tricked is that some sellers would be like oh yeah, I'm going to play golf the rest of my life. I'm out of here. We don't need to sign a non compete. I don't care. Trust me, six months from now this guy or gal, they're going to be bored out of their gourd here and they're going to want to, they're going to see all the things they could have done better and they are like, man, if I started fresh I could do this so much faster and easier and better. And they're going to start something online down the street, whatever it is. But these are also very hard to enforce. Courts are not like wanting to take away someone's livelihood to make a living. But they also realize someone paid for you not to come compete on day two. So there's a tug of war and this is where your lawyer is going to let you know based on your type of business in your region, in your area, you can't restrict someone over 50 miles or 2 years or is it going to be online or whatever. Your thoughts?

Yeah, I think when you're buying a business because of that, those competing interests of I just paid you to buy this business business, the enforceability of a non compete is very high. When you're doing a non compete with an employee and it's kind of a state by state issue. Even the FTC was trying to limit non competes recently. They got overturned in court. So with an employee, employee or relationship, the non competes can be dicey. You definitely got to be clear on legal counsel. I think when you're buying a business because there's a large payout to the seller, those are very, those are overturned. Less. Yes, you have a little more certainty to it. So we definitely want to get it. That is like a no brainer. You've got to get them.

But don't you think typically the most you're going to get is a couple years?

Yeah, I would say three years is kind of the standard. You might try to get five, but I would at least expect to get three years out of the seller of the business because and it's important for you to know, you know, if they're like no, I'm coming. If they're like no, I'm not Going to agree to three years. That's a pretty good indication they're going to turn around and start the business and compete with you.

Yes. Now that might ask for five and

see what they say might not matter. And I've had that. I had actually a dentist sell a practice and they moved to multiple states over. It's like, I don't need a non compete. I just don't care that you're in my little market. Knock yourself out and go be a dentist in two states over. I don't care. We're not competing for the same patients, obviously. But if your business is more nationwide, so you can kind of tailor that to what matters for your business and the business you're acquiring, it might just be a local area you need to target. And you're like, I don't care, seller, you want to move and go do the same business in some other town, knock yourself out. Here's another point that goes with that though, that I think is important to add in, which is the non solicitation. Because what happens is you buy a business that has employees or customers going to say, hey, you can't solicit the employees of this business. My vendors or the customers. Yeah, okay, these are mine now. That's what I really bought when I bought this business. So not only can you not go compete with me tomorrow, you can't solicit these other people to go to any business or activity or business relationship.

Yeah. And in fact, and this goes back to the other point, in fact, not only can you not solicit them, I need you to go on a farewell tour with me.

Yeah.

A lot of times I've called them that. You know, like we're gonna go shake hands and kiss babies and you're gonna tell all these customers and vendors, I'm the best guy and in the world and next best thing to slice bread and how I'm gonna do such a great job, we're gonna go on that tour and it better go well. And this is why in that purchase price allocation, I like Matt bringing up this seller financing. And there might even be a consulting contract where I'm gonna pay the seller for six months to come in and show us the ropes and really do this tour well and transition this and transition that. And it's okay to ask for that. In fact, I like it when you do because you want that seller to be a big help, but you also want them to leave. Can you just leave now? And that can be an issue. So be clear expectations.

Yeah, I love the Consulting agreement. Here's why it's nice as the buyer you're expensing dollar for dollar. So if I do a consulting agreement that lets me allocate some of the purchase price to the consulting agreement, which I love to allocate as much as I can because that person is so valuable. Yeah, they're so valuable because I'm expensing consulting versus other things. My personal business might depreciate over time, but there's just all the business reasons for the farewell tour. That's where you can throw in the non compete and non solicit is which with them as well. It's probably in some other documents too. But let me say this on the I want to make sure I hit this. I think I skipped this on the funding. We got cash seller financing and an SBA loan. So I want to just hit a couple terms on the SBA loans. There's two different types. There's the 7A and there's the 504. But generally you have to at least put 10% of cash in to get an SBA loan. And they're going to look at the business itself and they're going to look at the financials and be like do we actually want to lend on this? And then they're also got the credit worthiness of you as the borrower. Do you have any expertise in running a business or as a manager? Have you worked in that industry before? If you're buying a plumbing business, do you know how to do plumbing? You know, YouTube doesn't count, you know. And so those are the things that banks look at. I'll just throw Live Oak bank out there. That is the bank that does more SBA lending than anyone. I've worked with some of their loan officers on deals before. I've been very important actually. And then being able to do deals and actually being excited about it. And a lot of people walk into their bank and they're like I need to get an SBA loan. They're like who does those here? And you get some department and they like just give you a packet of documents like this or 20 different links or forms you need to fill out. So use those banks that really actually want SBA loans and don't just pretend to.

And let's make sure we get a link to Live Oak down in the description. We've send you to the loan officer we like. And this is again the team effort involved having a good lawyer that presents good documents, an SBA lender. If you show up with that one Piece of paper that kind of turns them off and they already like, this is already a nightmare waiting to happen. Go in well prepared with good documents. Ask them in advance what you want me to show up with so that you can really put your best footage forward. You want yes man from the movie yes man, but Jim Carrey, remember, the whole time you're talking I'm thinking of Jim Carrey who was like rubber stamping small business loans. And every. He was like, you know, it was a kind of a funny little sci fi where he had to say yes to everything. And so it was like banner day at the bank. Every small business owner was like, hey, I'm thinking of borrowing for this. He's like, yes, let's do it. Their dumbest idea. It was a funny show, but you want to really go in well prepared. Can we go back to entities? Yeah, yeah, okay. So one thing I wanted to throw out on Entities was you're typically going to, if you're buying an operational business, going to want an S Corporation. And an S corp is extremely valuable and powerful. Please get back to some of our prior podcasts and we've got so much written on this and online and on our YouTube channel. The s Corporation is going to be your entity of choice, but that doesn't mean you're going to want to buy their S Corp. I typically want you to go in with a fresh entity, an LLC that can be taxed as an S corp. And if you have partners or investors in your deal, we got to come to that in a moment. You're going to use an LLC to buy it and then have your own S corp as a owner of that llc. There's multiple ways to structure this. It's in my book, the tax and legal playbook. And again, lots of podcasts on this. But don't buy their entity. You're going to want an entity with partners, will be an llc and then you're going to convert it to an S Corp. And then unless you have partners and you have your own S corp, that's my tip. That's a big conversation. What's your take or advice on this?

Yeah, totally. I agree with that 100%. And we want a new entity. You know, this is a new business. Even if you're existing business owner or something else, let's start fresh. Let's get a new entity. And this is where you got to get in all this stuff of are you gonna buy their name? Do they have a name that you're buying in the business? Because they might Be like Prestige Worldwide stepbrothers.

Oh, there we go. Vandelay Industries.

Yeah, they could be that. And you might. But you're like, well, I don't want their llc, Prestige Worldwide llc. So you might need to be Prestige Worldwide Group LLC or something. You might have to. But you still could own Prestige Worldwide and get that trade name.

That's right. You can surrender it, you can buy

it, but just you're gonna have a little variation on the llc, the technical legal name, possibly. Or they could surrender it and transfer it to you at the state. And so that could be at play to obviously in the naming of the entity. Let's talk about investors, too, since you brought that open. That kind of relates to the entity structure. We already talked about some seller financing, of course, throwing in some cash or an SBA loan. But a lot of people bring in an investor. And so that's when we're going to do the partnership llc, and you'll have your S Corp own your piece of that deal. Maybe you own 60% of it and your cash investor owns 40%.

I don't know.

It could be 70, 30, 50, 50, whatever, you know. But that cash investor is going to get. You know, here's the thing. That LLC needs to have a pretty tight operating agreement. And our lawyers do these all the time with partnerships. Work partner, cash partner, whatever. But that you need to be clear about. Okay, they're putting in money to acquire this business. What if I need money in six months? Are they putting more money in or not?

Oh, there's so many things.

Do I need to put money in? If more money is needed later, you got to be clear about that. When we start distributing profits, do they get all their cash back first before we start splitting profits or not?

I've got a good point. Let me say this, too. This is like World War II with multiple fleets, fronts. Dealing with your partner and the investor is the I word is a lot of times we call the dirty word because you got to be careful calling them an investor and then treating them like a silent partner. They could get. It could blow up on you. So listen to some prior podcasts where we talk about partners versus investors and lenders. They could play a different role in that. But it's like a war where you've got, that's the Russian front. Then you're going to come over here to the, you know, the Eastern front and the Western front, because dealing with the seller is a whole battle in and of itself. Then dealing with your partner or investor, that's a Whole other battle. And they are two different operations, two different situations. You've got the South Pacific phase and the European phase, and they're very different. And so go into that very carefully as well, because bringing on a money partner could be as disastrous as the relationship with the seller. Or it could be wonderful. But you, you gotta deal with it carefully.

Only Mark Kohler could bring Paul that analogy.

I don't know.

I mean, it worked. It worked.

Oh, wow.

Okay.

Sorry.

I'm still stuck on World War II. I had something really important I wanted to say.

Oh. See, one, if one situation you're dealing with Stalin, the other one you're dealing with Hitler. You know, it could be great or bad, but.

Oh, I remember.

Okay.

All right. So I want to say this because when you bring in an investor, typically in a business entity where they're putting in the cash to acquire, they're basically buying stock in your company, right. They're giving you a cash injection that's going to be used to buy. It is you're typically not paying them out first. You're going to use the cash flow, maybe reinvest and grow the business. I mean, this is going to be your work. So you're going to be using that and you can get a salary on top of it, but you're going to be splitting up profits. Now, you might have some type of preferred equity for them that says when we sell this business later, at some point, if we do, then you get paid out your cash back before I get a distribution. Now, you don't have to do it this way, but just know it's not always like, oh, the cash investor has to get every penny paid back before I get any profit in this business. No, you could do it that way, but that's actually not the most common in a business business structure that might be common in a real estate deal. You're flipping a property or something. Obviously there's a liquidity, but just know that there's a couple different ways to do that. And I think the best way if you're being a cash investor is say, hey, that's basically buying ownership in the company. You're going to get profit distributions just like I am. But I'm working and running this business. Found the deal, the opportunity. When we have a liquidity event, we sell this business, or maybe we're going to bring in some debt, we can pay you off, but otherwise you're not getting every penny first.

I love it. Because there are so many. My analogy is even better now because again, this is A whole other type of negotiation that's going on on the side besides buying the business. So take that very seriously. I want the homework I want to give all of you here is go watch about 10 episodes of Shark Tank. I am not kidding. That is one of the best shows to get a feel for, for a possible investor part owner. Because when those guys are Mark Cuman or whoever's throwing out ideas of how they want to be a partner with you on your deal or buy into your deal, it's going to give you a lot of insight into even this negotiation with the seller and the buying of the business, because you're now on the other side on that Shark Tank situation. And it gives you a lot of creative ideas to how to approach it.

Yeah. Okay, let me hit another item that should be in the agreement. And this is one of the things that sometimes causes some sticking points, is the accounts receivable and the working capital. So on accounts receivable, you got to be clear, all right? When I buy this business on the balance sheet and the assets, it said that it you were owed money, I'm buying your accounts receivable. There's $50,000 your company still owed. I want to collect on that. And that can make sense because a lot of businesses kind of, they're charging their customers every month and they got kind of some invoices out and the next customer comes in and it lives off of that, quite honestly. Now, if you're not clear on that and you just bought the assets of the business and you weren't clear, I was buying the accounts receivable. The seller could be like that. Accounts receivables owed. To me, that was work I did last month. So you got to have clarity on that. And then the next piece is. Sometimes people call it the working capital, like the money in the bank account of the business. A lot of times I've heard the analogy of a buyer buying a business and being like, well, all right, I bought this business, but it's kind of like buying a car. There needs to be some gas in the tank for me to get the damn thing home. I don't just buy the business and there's not a cent in there. I just cashed you out. I just gave you a bunch of money. Do I have at least a month or two of working capital in the business account or what do we do with that?

And I'll tell you, when I've represented a lot of sellers, I'm not leaving any money in the bank. Yeah, I'm not That bank account's mine, the accounts receivables mine. You just bought all the assets, knock yourself out and you better bring money to the table to put gas in the tank. And I love that analogy. So. But it's gonna, it's done both ways. It really is. This is again where you're get, they're saying, well you would you can buy my business for a million dollars. Well that was the letter of intent. Now we're getting into the weeds and when they go, oh, I'm keeping ar, oh and I'm not leaving money in the bank. Oh, and yeah, the non compete, you know, you're like whoa, whoa, whoa, this, this purchase price just went down to 600 and right. And that, and you never said any of that in the letter of intent. So that's why you've got to give yourself flexibility in the letter of intent. Say I will buy your business based on due diligence and further negotiation of X. And then they, you know, you start the dance, you know, you're really dancing the poker game, whatever. And you're going to start putting your chips on the table. They're going to put their chips on the table and again be willing to walk away because six months from now they may want to start the discussion over again because they think again, sellers think it's always worth more than it really is. Just know that, just know that sellers are going to think that A lot of times our job as a lawyer is to walk them back away from the cliff because they, and it's so emotional for them.

Yeah.

And so in this be work with kid gloves, get your offer on the table, start going through these things because when they have their reality check and it may not be during your negotiation, it could again be six months, a year later and then they want to get back to the table with you and they've realized, all right, let's have a real conversation.

Yeah. Alright, so these are all the conversations, the documents, the key terms that are going to get into this asset purchase agreement. It could be a stock purchase too, but you're still going to do all this stuff we talked about by the way with the stock purchase. Now when we get down to, we talked about the entity, you know, you're going to have a new entity set up, S Corp, maybe an llc. You could have your S Corp owning a piece that llc, you've got some, you figured out the financing, how you're going to take it down. What actually happens is now you go to closing quote unquote and we're going to talk about transition the business in the next series. But that's where you're at here and you're actually with the way this happens is you actually sign the asset purchase agreement at closing. There's a bill of sale. Typically that's actually saying we've sold the business.

Promissory note.

There's the promissory note for the seller financing. You might have some releases of liens. Maybe the seller had equipment with liens and you're paying those off.

Off.

You're gonna have assignments of leases. If there was like a location you need to assign the lease and a lot of time you would have had to make sure the landlord was okay with that.

Yeah. UCC filings. If there's some notes with security. You could also be signing the non compete at that point and consulting agreement. All that assumption agreements like you might be assuming the lease with the landlord because you're not buying the building. There could be trust deeds signed if you're buying real estate in the deal. So there's a lot of moving parts here. And going in again with your eyes wide open of why you need legal counsel in this is I can't emphasize it enough.

Yeah. If you haven't already got that vibe, I need a lawyer to do this. By the way. You've also got to worry about how you're going to run that business on day one, which we're going to talk about next here and the transition and takeover after you've acquired a business. I mean there's a lot of business stuff you got to be focused on so you hit the ground running. If you're trying to play lawyer over here because you're trying to save a few bucks, you're setting yourself up for failure.

Yeah. And can I say don't wait for part three of this miniseries after closing to listen to it. We want you to, you know, pay attention in part three because it's going to give you a lot of insights and what you might want to negotiate for and with that purchase price and realizing again, sometimes starting your own business is easier than buying someone else's business. Sometimes it's a lot easier to buy someone else's business rather than start a business. And that's what you're really weighing here. And so hopefully this section has been very revealing and helpful for you to know what you're getting into so that you can be better prepared.

Yeah. And Mark Fetzer is the lawyer in our firm, KQS Lawyers Helping Client every day on this. He runs that specific little practice within the firm Nationwide has tons of great experience, done a lot of deals helping clients buy or sell a business. So if you get over here, you don't ask for Mark or Matt. We actually don't work with clients much anymore. So you want Mark Fetzer. That's. He's like. He's like the guy that actually does this every day, the real pro.

And my final word of wisdom is don't give up. Don't give up on your dream if you're passionate about this idea. And again, it can evolve. I hate the quote that's out there sometimes that, you know, three out of five small businesses end in less than five years. Or some weird crazy statistic that businesses fail all the time. No, I want to say my business owners, they pivot. The business is not going to look the same from now, three years from now. And that's okay. Be willing to modify your idea, your. Your theory, your product mix, your vision for this. And that's not a fail. That's what business is about, is learning how to modify and pivot and grow and evolve. And that, to me, is success. And, yeah, it may look totally different three years from now. And some statistics and call that a fail. I call that a win. Because you've been able to succeed and be agile and. And what's a good word for that? I don't know.

I thought agile. You could have just been successful.

I'll leave it at agile.

Yeah, there you go. Well, thanks, everybody, for tuning in. Make sure you're subscribed to the podcast. We want to make sure you're getting all this amazing content we're putting out. And don't forget, we got part three coming up still, and we will see you next time.