Are you contemplating buying an existing business? Doing so can be greatly advantageous, because the business may be well established and have a solid track record of profits. No matter how attractive the opportunity seems to own your own business and be your own boss, it is important to proceed with caution and the proper advice.
Most importantly, you will need a qualified and trusted Certified Public Accountant to review the history of the business’ accounts. Have all records been disclosed? Is all that profit real? Has the business been subsidized by injections of cash from elsewhere? Has the business been concealing profits from the IRS? What is the state of the assets, accounts receivable, and accounts payable? Is the lease renewable? These questions and more should give you an accurate view of the health of the business, and importantly, whether the asking price is realistic.
In conjunction with your financial investigation, you’ll need to determine how to pay the purchase price. The conventional lending environment can be a challenge in today’s economy, and the SBA is getting more restrictive. Alternatively, the seller may be willing to finance the purchase. Either way, you should be able to incorporate financing into your cost of running the business.
Most businesses are purchased via an asset purchase or a stock or LLC membership purchase. An asset purchase is where the buyer typically buys all of the assets of the business, such as inventory and customer lists, but does not buy any existing stock. Asset purchases are favored, because they typically give the buyer a clean slate to start with relative to any liabilities the seller may have.
It is vital for the buyer to understand exactly what is being purchased. Will you have rights to the phone number? Internet domain name? Logos? The name of the business free from copyright infringement claims? Has the seller agreed not to re-start a competing business, and not to try to lure away customers?
These considerations are only the tip of the iceberg, but having good financial, banking, and legal advice before purchasing a business can yield success, or help you realize that the deal is really too good to be true.
Adam B. King is a Ketchum attorney with 24 years’ experience. His practice includes municipal law, homeowners’ associations, immigration, real estate, and business. He recently authored Idaho Condominiums & Townhomes, www.idahocondobook.com.
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