Ensuring Success Post Acquisition: How to Avoid Common Problems Business Buyers Encounter After a Sale

This article was originally published in Flippa on April 18, 2024. Read the full article here.

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Ensuring Success Post Acquisition: How to Avoid Common Problems Business Buyers Encounter After a Sale

So you’ve just bought your first business. Congrats! Now, the work begins.

The business buying process can be a long and arduous one. Many buyers think they’re in the clear once they’ve officially closed their deal.

Unfortunately, that’s not always the case; there are several legal issues a buyer may face in the wake of a sale. Thankfully there are ways that you can safeguard against these pitfalls before the deal closes.

Because closing a deal isn’t necessarily the end of a buyer’s journey, it pays to be prepared for what may come after, including:

Seller Competition

As a buyer, you always want to believe you’ve cultivated a great relationship with the seller – and this could very well be true. But, at the same time, that seller likely has deep industry knowledge, contacts, and experience, meaning they’re well-positioned to start a new, competing business.

This is why putting a non-compete agreement in place is crucial before the sale is initiated. This prevents the seller from starting a similar business in competition with yours. While it may be daunting to have that conversation, these kinds of non-competes are pretty standard when attached to business sales agreements, meaning that it likely won’t put a bad taste in the seller’s mouth when you ask them to sign one.

A standard non-compete will include a limitation on geographic scope (where the seller can and cannot operate a competing business) and duration (how long the seller is limited from competing), along with a description of the type of business the seller cannot operate.

The laws covering noncompetes vary from jurisdiction to jurisdiction, but in most cases, such restrictions must be ‘reasonably related to legitimate business purposes.’ For example, if you’re buying a car wash in Florida, telling the seller they can’t operate a car wash in Kansas would be unreasonable. In contrast, if you’re buying a nationwide distributor of goods, such a geographic scope would make sense.

Confusion Over Purchased Assets

A failure to agree on which assets will be purchased by you or retained by the seller could cause you to lose out on valuable parts of the business and set you up for a host of expenses after the sale.

Before closing the deal, you can work with an attorney to create an Asset Purchase Agreement (APA). Commonly used in business acquisitions, an APA is a comprehensive legal contract that outlines the terms of the sale of specific assets. It meticulously outlines all of the assets that will be transferred from the buyer to the seller, including tangible assets like equipment and inventory, as well as intangible assets such as intellectual property.

If the purchase includes the workforce, buyers should also outline employee contracts, benefits, and any related obligations. This ensures a smooth transition for both the employer and employees. If the business has key employees who are crucial to the going-forward success of the business, you can require those employees to sign an employment contract as a condition to closing. Often, the best way to retain talent is with financial incentivizes.

Departure of KeyEmployees

When a well-liked orwell-respected owner leaves a company, employees can feel destabilized orjarred – especially if they’re expecting big organizational changes in the wakeof the sale of their company. As a result, they may be braced for layoffs or restructuringand start interviewing for other roles.

To mitigate this, besure you’ve prepared retention strategies for key employees and start ideatingsome ways to incentivize them to remain employed by the company after the sale.If you’re able, communicate with employees about your plans and be transparentabout what it means for them and their job function. 

Loss of Clients and Suppliers

It’s an unfortunate fact that, after a sale, some businesses do lose key clients or suppliers –especially if they’re deeply ingrained in their local communities. For many of these individuals and businesses, their business relationship is very personal; they’ve been doing work alongside the old owner and might not be willing to continue a relationship with someone new.

Work closely with the seller to develop a transition plan for client and supplier relationships and advocate for clear, ongoing, early communication with the suppliers and clients impacted by the sale of the business. This might entail joint meetings to introduce yourself to these individuals to ensure continuity of service and an increased likelihood of ongoing business relationships.

Sellers Who Don’tComply with Contractual Terms

Occasionally, you’ll run into a seller who either doesn’t appreciate the terms of the sale or refuses to cooperate with those terms. For example, we often run into sellers who attempt to walk away with assets that were sold in the transaction. In some instances, those assets are immaterial to the success of the business, such as a computer or office furniture. In other instances, unfortunately, those assets can be core to the going-forward success of the business, such as an Amazon seller account with thousands of reviews.

In either case, you’ll want to be sure you’ve engaged an experienced transactional attorney to draft your agreements. It often makes sense to have that attorney’s support post-closing to ensure that you get the benefit of what you paid for.

Buying a business is an exciting moment for everyone involved, both personally and professionally. In the hustle and bustle of the acquisition process, it is important to consider the above factors – preparing ahead of time for these issues can make all the difference when it comes to a successful transition from the seller to you, the buyer.