You Need to Know These 3 Tips When Buying a Business
September 14th, 2014 at 11:04 AM
Every buyer of a small business needs to consider the following 3 issues when purchasing a business”
- Buy Assets and Not Liabilities. “Asset Purchases” are recommended whereby the buyer acquires the assets of the business only. The assets include goodwill, name, equipment, supplies, inventory, customer lists, etc. A properly drafted Asset Purchase Agreement do not include the prior owner’s liabilities. Under an Asset Purchase the buyer typically establishes a new company to operate the business. Again, this new company is free from the prior company’s liabilities. A “Stock Purchase” occurs when the buyer acquires the stock or LLC units of the existing business. The disadvantages of the stock purchase is the liabilities that come with the purchase along with the assets, and the liabilities are difficult to quantify. Also, the new owner in a stock purchase takes on the current tax position of this company that may leave the new buyer with little in assets to depreciate. On the other hand, the Asset Purchase provides a new tax basis for the assets purchased at their fair market values.
- Negotiate for Seller Financing. Many small business purchases include some form of seller financing whereby the seller agrees to be paid a portion of the selling price over time via a promissory note. This is an excellent strategy for the buyer as it keeps the seller interested in the future success of the business, and facilitates the transition as well. Also, the buyer has some leverage if the seller made any misrepresentations during the sale causing financial loss. Therefore, seller financing provides the buyer with some assurance that the business is valued properly and fairly transferable.
- Conduct Adequate Due Diligence. I recommend that buyers review signed tax returns that were actually filed with the IRS, as opposed to the seller’s statements and e-mails, etc. Also, have the seller complete a due diligence questionnaire where the seller represents the condition of the business to the buyer. An experienced attorney can be of value in this process.
Buying an existing business is a significant financial and time commitment. Hire an experienced attorney and CPA to make certain that you cover all the bases.