A Definitive Legal Guide for Buying A Business

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Buying a business can be a difficult task for someone who has never been a broker. Now, it seems like a small business for sale has caught your eye. That’s very interesting to know because it’s a tester for your entrepreneurial skills. If you can get a business opportunity which is already operating, that could be a great idea.

 

One of the common question people usually ask is what to know before buying a business. In this post, we are covering the topic with examples and making a checklist for buying a business. Let’s start. Haven’t you read this yet? Comprehensive List of Small Business Ideas

Things to Look Out for When Buying a Business

Buying-a-Business

As you are in a position to own your small business, before you buy a business, discover the real reason behind the sale of it. There are plenty of online businesses for sale and when you look deeper into it you find out that the niche market has narrowed down and there is very less profit. Let’s formulate a few things here.

  1. Buy the assets not the business
  2. Taxation is critical. Ask about sales taxes and payroll taxes
  3. Who will deal accounts receivable?
  4. Is the seller leasing the premises?
  5. Are there Prepaid expenses?
  6. Write a good “letter of intent.”
  7. Read the sales laws in your State
  8. Get an indemnity from the seller
  9. Take help from seller to know customers
  10. Get to know the employees 

Let’s know these ten points in more details.

Step 1: Buying Assets of a Business

Buying assets of a business entail purchasing tools and equipment such as property, accessories, customer and client’s goodwill. To avoid liabilities and get better tax treatment, instead of buying a business, offer to buy the assets of the business, and form a separate company to act as the purchaser.

Avoiding liabilities are important when the company is sued by someone for business in the past.  Secondly, you get a better tax treatment, since your “tax basis” in the assets will be the amount you paid for them, rather than the amount your seller paid for them long ago.

The company being acquired is responsible for the following three liabilities:

  • Workers’ compensation premiums
  • Unpaid excise taxes
  • Unemployment taxes

Step 2: Taxation is Critical!

taxes

Step 3: Who will deal accounts receivable?

It is very important to determine who will deal with the accounts receivable. There is a possibility that some of the firm’s customers will owe the seller money on the closing date.

There are two ways to deal with this. Either you purchase the accounts receivable at closing (for a discounted prices) or let the seller collect them at his own.

accounts at closing

Step 4: Is the Seller Leasing the Premises?

You need to see if you there is seller’s lease.  If yes, you should find out these two things.

  1. How much time remains in the lease term for renewal?
  2. Whether the owner/ landlord is willing to let you get “as is” term and lease.

It is recommended to renew the contract to 5 or 1o years if the lease renewal time is less than 2 years. Read this too: What is the scope of small business marketing?

Step 5: Prepaid Expenses

expenses

Step 6: Write an Effective “letter of intent.”

You need a good ‘Letter of Intent’.  The LOI is a small, two- or three-page agreement between the purchaser and the owner, the seller of a business that spells out all the necessary terms and conditions of the business sale.

The LOI stage is typically where the seller has the most negotiating power, so he may take advantage of it. Beware of this thing. Create a list of items that must be agreed upon for the sale to close.

Step 7: Watch out for bulk sales laws in your State

Most of the states have done away with these, but many states still require the buyer of a business to notify the seller’s bankers that the transaction is going on. This is essential. Failure to get a list of the seller’s bankers and send “notices of sale” to them may give the seller’s creditors a shot at reversing (or “rescinding”) the transaction in order to prevent the seller’s assets from being sold out from them.

Step 8: Get an indemnity bond from the seller

Don’t forget to get indemnity insurance or bond.

indemnity bond

Step 9: Know the Customers, take help from the Seller

Make sure the retailer sticks around for a while. In many retail and service businesses, the consumers have a personal as well as a business association with the owner. You need help at the business for a few weeks after the closing to introduce you to customers, help you figure out the books and “ensure a smooth and orderly transition of the business.”

Step 10: Get to know the employees

Before buying a business, make sure the “key workers” are willing to stay with you since they are often the ones who deal with customers day to day, operate the system “where the bodies are buried.” Many retailers will be hesitant to let their employees know the business is up for sale, for fear they’ll quit en masse. In that case, put a provision in the sales contract that reads as follows.

employees notice

Things to Remember while buying a business!

  1. See What’s Included in the Asking Price (Add it in LOI)
  2. Look Under the Hood
  3. Find Out What it’s Actually Worth
  4. Take it for a Test Period? 
  5. Review Your Financing Alternatives

There are so many questions to be asked!

No matter what type of business you’re thinking about buying, there are some generic questions that you should ask right away, such as:

  • What exactly does the business do?
  • Do you know what the history of the business is?
  • Why is the business for sale?
  • Age is not a number here. How old is the business?
  • Are you dealing with a business broker?
  • How long has the business been operating under the current owner?

So, let’s wrap up the whole topic in a few words. Before buying a business you need to see it: Carefully!

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