Caught in a Customer Disappearing Act In today's economy, no one can predict how much atttition will take place.
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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.