Purchasing a Texas Franchise or Company Already in Business

Since only about twenty percent (20%) of new businesses survive past their first year, many savvy entrepreneurs prefer to buy a company or franchise that’s already up and running. That often proves wise – if the purchaser is willing to complete all the necessary research to make sure the current signs of financial success aren’t threatened by factors that no one is willing to disclose.

To make sure you handle all crucial due diligence inquiries properly, consider asking your experienced Houston business lawyers for the help and insights they can readily offer as you explore all the possible investment risks.

Once you’ve carefully answered the following questions — and analyzed the various concerns mentioned — you should be better prepared to decide whether to purchase a specific business or franchise.

Important business questions to answer – and key concerns to evaluate

  1. Is the product or service a good match for your interests and experience? People are often most successful when they feel passionate about the business they’re running. Should you be entering a field that’s unfamiliar to you, be prepared to hire different consultants as needed. Of course, if you’re buying into a franchise, the corporate headquarters will usually offer valuable training and products to help you;
  2. Why is the business for sale now? Is the current owner truly planning to retire or move closer to family across the country? Ask the current owner very direct questions. If you’re trying to buy a franchise, you’ll need to obtain a copy of the Franchise Disclosure Document. (This was formerly known as the Uniform Franchise Offering Circular or UFOC). It will fully inform you about a franchise’s financial, legal and personnel history;
  3. What business location is best for you? Be sure to ask the current owner to provide you with a breakdown of the business’ most regular customers. Are they residents of nearby neighborhoods — or simply commuters who work in the area? What types of seasonal downturns, if any, should you expect in business profits? Be ready to purchase zip code-based demographic reports that can provide you with information about your current customer base. There are also different types of geographic-information-system software programs that can help you evaluate consumer trends tied to local neighborhoods and the most recent census. (Always be sure your business location can offer adequate parking);
  4. Do you have adequate financial knowledge and good funding sources for your purchase? Be sure to have your Houston attorney review all the general business or franchise contracts tendered to you. Only work with a trustworthy financial consultant who can help you review each company’s current operating expenses. Also, obtain the help of a qualified lender you’ve dealt with in the past – or someone who comes highly recommended by business contacts you’ve known for years;
  5. Determine if you’re personally willing to take a “hands-on” approach to running the franchise or business. Be prepared to pay good wages to any managers you must hire. Good ones can “make or break” a successful franchise – or any other type of business. Be sure to tell any impressive managers and employees you meet that you may keep many current staff members on in the future – once you’ve reviewed all employee files;
  6. Be sure to personally observe the current quality of customer service. Ask about the specific training that helped produce the successful parts of it. Be prepared to provide an employee orientation and training program that honestly promises good wages and job benefits so employees will know how important they are to you;
  7. Network with similar local business owners and managers in the area. If necessary, consider taking one or more of them to lunch or dinner so you can pose insightful questions about their most difficult daily challenges doing business in the area;
  8. Find out what types of marketing plans are currently in place and if you can expect any corporate support in this regard. If you aren’t buying a franchise, contact the nearest small business administration (SBA) office to see what types of marketing and business planning programs they can offer to you;
  9. Plan on developing some type of regular community “presence” that can benefit everyone. This may take the form of financially sponsoring one or two local children’s sports teams. When you pay for the equipment and help secure uniforms – often emblazoned with your company name or logo — everyone will likely benefit;
  10. After you’ve completed all due diligence inquiries, visit pertinent local government offices. Check to see what types of new building permits have been issued – and find out if any new zoning changes will soon be enforced that could negatively affect the business you’re hoping to purchase.

Finally, read all you can about what has helped so many successful businesses and franchises remain profitable over recent decades. The more you learn about each of these companies, the more likely you’ll be to succeed in running your own franchise or new company.

At Murray Lobb, we’re always ready to help clients who may soon buy an operating business or franchise. We can guide you through all the detailed due diligence inquiries – and draft all the contracts and other documents you’ll need.

Buying a New Company:  Conducting Due Diligence

Depending on the nature and size of the business you’re interested in buying, the process of completing due diligence can be straightforward or complex. Fortunately, the basic steps you’ll need to follow are rather standard.

After your lawyer has negotiated a Letter of Intent (LOI) with the seller –  covering each party’s duties and responsibilities involving confidentiality, exclusivity and other matters – you’ll be ready to begin the due diligence phase of possibly buying the company.

The Main Reasons for Performing Financial Due Diligence

This process is partially designed to help determine if the initial evaluation placed on the business is fair and if the company is both stable and viable. Time must also be set aside to review all current contracts and potential legal and regulatory liabilities.

Some of the specific aspects of the business you’ll want your Houston business law attorney and personal accountants to carefully review and examine are set forth below.

  • All accounts receivable and payable
  • At least the last three years of the company’s tax filings
  • All current payroll obligations
  • Most or all the major banking transactions for the past year or more
  • The full nature and extent of any outstanding loans on the books

As this initial list of matters indicates, this process can take many months with some businesses. Normally, the parties negotiate the timetable for completing all due diligence examinations in their Letter of Intent (LOI).

Special Inquiries You Must Include Regarding Other Financial Matters

Hopefully, your review of all the financial accounts won’t turn up any troubling questions that can’t be answered. However, since a small percentage of business sellers may be dishonest, your due diligence team must carefully watch out for certain types of “red flags” or irregularities. These can include some of the following concerns.

  • Missing funds
  • References to non-existing accounts
  • Improperly filed tax returns
  • A varying degree of bad debt that’s regularly written off
  • Unstable profit margins

Your lawyer’s due diligence inquiry must also include carefully reviewing all current contracts with other businesses or corporations.

Key Concerns Involving Executory Contracts

  • When are they each due to expire? (This is important since this information can affect the company’s current valuation and other issues). For example, if current supplier contracts are ending soon, you may soon find yourself having to pay far more for critical supplies;
  • What’s the status of all customer contracts? You need to be sure all funds owed to the company are being collected regularly and all goods and services promised are being delivered in a timely manner. Failure to carefully monitor all contract terms can cost you valuable customers and open you up to major legal liabilities;
  • Are all Service contracts being carefully monitored? Nearly every business is dependent on outside service vendors to keep their manufacturing and other equipment working properly. Likewise, contracts are often in place to secure the professional services of lawyers, accountants, computer repair technicians and others. You must make sure the company is properly honoring all these contracts and renegotiating them in a timely and responsible manner;
  • Are all current leases being properly maintained? Companies can’t afford to accidentally let leases lapse on buildings or other property that are essential to their daily operations.
  • Employee Agreements? Do current employees have employment agreements with non-compete clauses? These must be carefully examined because they cannot be assigned if you are only buying the assets.

Due diligence can also extend beyond merely reviewing key financial documents and contracts. It should also include a detailed review of all actual or threatened litigation and regulatory investigations.

Your Lawyers Must Review All Current or Likely Lawsuits & Regulatory Challenges

Each of the following issues must be examined regarding all current or anticipated litigation. They may prove crucial if you decide to still buy a specific company since you’ll probably need to request contractual indemnity for all future liability (and litigation expenses).

  • How costly might each case eventually prove to be? In other words, what potential liabilities are involved?
  • Has the business received formal notice that any of its operations may be operating in conflict with any state or federal statutes or regulations?

You must be willing to sit down with your lawyer and the target company’s current legal counsel to sort through all these legal and regulatory concerns since they directly bear on the business’ current valuation and the wisdom or folly of buying it.

While the due diligence concerns referenced above are not intended to be fully comprehensive, they should help you understand many of the critical matters that must be examined. Once you make it through this due diligence stage, you can then either decline to buy the company or move forward into the “closing” or final transactions phase.

Please feel free to contact our law office so we can help guide you through the various stages of due diligence as you try to decide whether you should buy a specific company.