Caught in a Customer Disappearing Act
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Q: "I've been talking with the owner of a very popular local service business who wants to retire. I would love to buy his business, but I'm afraid that with the bad economy, the business won't be doing as well next year as it is today. How can I protect myself legally in case the customers all disappear after I buy this business?"
A: When buying any business, there's a risk of "customer attrition"--a significant decline in sales after the business changes hands. In today's volatile economy, no one can predict how much attrition will take place, and you can't legally prevent customers from going elsewhere or buying fewer services. Accordingly, your seller should cooperate with you to keep attrition to a minimum and share the pain if there's significant attrition due to circumstances beyond your control. Here are some ideas:
- The seller should agree to hang around for at least three months after the business changes hands, without pay, to introduce you personally to his customers and otherwise ease the transition.
- The seller should send a letter (drafted by you) to all his customers to announce the sale of the business and encourage customers to continue doing business with you.
- If you're paying for the business in cash, hold back at least 20 percent of the purchase price and promise to pay it to the seller in X months, less the percentage (if any) by which gross sales decline during this period.
- If you're paying over a period of time, say that if gross sales for the first X months you own the business fall below a specified percentage (90 percent to 95 percent is customary) of what they were for the same number of months the previous year, you're permitted to reduce the installment balance dollar-for-dollar by the amount of the shortfall.
- Consider a "put" agreement, requiring the seller to take back the business and refund part of your purchase price if gross sales drop off 50 percent or more during the first X months you own the business.
Your seller will likely balk at any post-sale reduction of his purchase price and will want to be protected in case you underreport sales or run the business into the ground by your own actions or negligence. To make him more comfortable, allow him (or his accountant) to examine your books--so he can verify your sales reports are accurate--and promise you won't make any significant changes in the business for a period of X months without his consent.
Cliff Ennico is a syndicated columnist and the author of several books on small business, including Small Business Survival Guide and The eBay Business Answer Book. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.