Buying an existing business looks like a shortcut: customers, employees, suppliers and goodwill from day one. But alongside the business there may also be exposure to debts, claims, employee liabilities and problematic contracts. Some of it only surfaces after the money has changed hands.
Two points are critical to protecting your investment: what is checked before signing, and what is written in the agreement.
"The Seller Says It's Profitable" Is Not Due Diligence
A seller presents the business at its best, and that is natural. The buyer's job is to verify. Revenue, expenses and profitability require independent review, together with an examination of the obligations and rights that allow the business to operate.
Representations in the agreement matter, but they are no substitute for checking. It is far better to discover a problem while the price and terms can still change than to be left with a lawsuit after closing.
Shares or Assets: What Actually Transfers to You
The first question is the deal structure, and its implications are significant.
In a share purchase, you acquire ownership of a company that continues to bear its own debts and liabilities, including exposures you may not know about: a tax debt, a claim not yet filed or a supplier still waiting to be paid. These debts do not automatically become your personal debts, but they erode the value of your investment and may require additional capital.
In an asset purchase, you can define which assets and liabilities are acquired. But here too, the deal is not necessarily "clean": under Section 30 of Israel's Wage Protection Law, when ownership of a business is transferred, the new owner may bear liability for wages and pension contributions owed to employees for the period before the acquisition. In addition, contracts and licenses do not automatically transfer with the business.
The deal structure also has tax consequences, and the structure the seller prefers is not necessarily the right one for the buyer. This should be reviewed with an accountant before committing to the transaction structure.
Due Diligence: What It Reveals
Legal due diligence examines what you will not see in the seller's presentation: debts and liens, legal proceedings, the status of the lease and whether it can be transferred, licensing, employee liabilities, key supplier and customer contracts, and intellectual property rights.
Due diligence is not only about a "yes" or "no." Its findings are negotiating tools: a price reduction, an undertaking to cure a defect, a condition to closing or an amount held back as security.
The Agreement: Who Holds the Pen
The first draft of an agreement carries a built-in advantage. The drafting party sets the starting point, the definitions and what is "taken for granted," while the other side has to negotiate every change. When the seller's draft is the basis, it is important to identify the protections missing from it, not only to comment on what is already there.
Several mechanisms determine whether you will have real protection:
- Representations and warranties: the seller's statements about the business and its liability if they prove untrue.
- Disclosure schedule: where the seller lists exceptions to the representations. Its effect depends on how the agreement is drafted, and even a disclosed issue can justify a price reduction, a demand to cure it or a specific indemnity.
- Conditions to closing: what must happen before the deal closes and the purchase price is released, such as landlord consent, removal of a lien or receipt of an approval. Without them, you may end up paying for a business you cannot operate.
- Indemnity and security: who pays for past debts or breaches of representations, under what conditions and for how long. A seller's undertaking is not enough if there is no practical way to collect from them.
- Escrow or deferred consideration: part of the price can be held in escrow or paid later, but the agreement must specify when the funds can be used, withheld or set off. Deferring payment alone does not guarantee protection.
Mistakes That Cost the Business
A deposit without conditions. Money transferred without agreeing when and how it will be refunded becomes a dispute before the deal even happens.
A letter of intent signed casually. The title does not determine whether a document is binding. Its wording and the circumstances may create obligations at this early stage, including confidentiality and exclusivity. The commercial understandings in it also become a starting point that is hard to walk back from.
A lease left unaddressed. A business without the right to stay in its premises is not the same business. Landlord consent, the lease term, options and guarantees must be part of the deal, not something to sort out "later."
A seller who opens across the street. Without proper non-compete and non-solicitation terms, you pay for the goodwill and may find yourself competing with the seller for the same customers and employees.
A business that does not function without the seller. Customer relationships, know-how and management often rely on the seller personally. A handover period and an orderly transfer of relationships, information and access are part of what needs to be acquired and documented.
Which Entity Should Buy
Buying through a limited company generally limits the buyer's personal exposure. But guarantees given to banks, landlords and suppliers expose the buyer beyond their investment in the company. The scope of those guarantees and the terms for releasing them are matters for negotiation, not clauses to sign automatically.
How We Can Help
- Legal due diligence focused on the risks that affect the price and the decision to buy.
- Drafting the purchase agreement for the buyer, or reviewing and negotiating the seller's draft.
- Deal structure and protective mechanisms: conditions to closing, escrow, indemnity, security and non-compete.
- Support through closing: the lease, third party consents, employee matters and the transfer of rights.
Before transferring a deposit or signing a letter of intent, make sure you know exactly what you are buying, and who will pay if it turns out you also bought problems that were never priced in.
This article does not constitute legal advice and is not a substitute for a specific review of your transaction.
Natan Mordechai, Adv.
Admitted to the Israeli Bar in 2020, Natan holds a degree in Business Administration with a specialization in Accounting. His practice focuses on transactions, mergers and acquisitions, commercial agreements, technology law and privacy. Before founding the firm, he worked as an investment analyst covering private-market investments at an institutional investor, bringing both legal and financial perspectives to his transactional work.
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