What to Look For When Buying a Business
Are you looking forward to buying a business? Purchasing an existing business is the simplest way to become an entrepreneur. You don’t have to work through the risks and challenges associated with starting a business from scratch. But are you sure you’re making the right decision?
Finding is not a big deal. However, the main challenge should be whether the business you buy will provide the returns you need. An easier way to determine this is by hiring an acquisition team. In this team, you need to have a broker, an attorney and accountant.
These experts will help you in undertaking your due diligence. They’ll take you through the process and offer guidance when necessary. The following are some areas to get clarification on before making the payment and buying a business.
1. Buy the Business Assets not the Business
First, you’ll need to understand the type of business that the seller operates. Is it a partnership, sole proprietorship or a limited company?
If the business is an LLC or a corporation, don’t make the mistake of buying their share capital. Instead, make an offer to purchase the assets that the business has.
In simple terms, incorporate a different company to purchase the business. But why can’t you buy the enterprise directly? Well, there are two reasons for this.
At first, you’ll have to evaluate the assets of the company at a present market rate. This means that the taxes you pay for these assets will be based on the current rates. With depreciation taking its toll on these assets, the amounts you pay will be lower. If you acquire the existing firm, the taxes you pay will depend on their initial purchasing price.
Secondly, where the company owes money to a different person or someone wants to sue it, you won’t be held liable for this damage.
2. Enquire About Payroll and Sales Taxes
Before purchasing a business, ensure that the seller doesn’t owe the government any taxes. If there are tax debts, the government will hunt you down and you’ll have to pay or end up in jail.
If the seller was using a payroll service, ensure the seller is in the present employment status. After this, ask the tax authority to issue a tax clearance certificate for the business you are about to buy.
This is also dependent on the state. For example, if you are looking for businesses for sale in Miami Florida, make sure you have a strong understanding of payroll tax law in Florida so that you can make an informed decision about the business.
It may take time to get these documents in place; however, they’ll save lots of headaches down the road.
3. Agree on How to Treat the Account Receivable
Chances are high that some customers owe the business some amount of money. You need to agree with the seller on the person to take proceeds from this account.
Here there are two options; the first is that you may purchase the debts at a discount. Here, you need to take into consideration that some of them won’t be paid at all. The second alternative would be to let the seller collect these debts at their own pace.
4. Check the Status of Business Lease Agreement and Whether You Can Assume it or Not
Check whether the seller has been leasing the building housing their business. If this is the case, you should ask if you can assume the lease agreement.
Here, you need to check the amount of time remaining until the completion of the lease agreement. Also, check whether the landlord will allow you to continue using the premises without hiking the rent.
Where the lease has less than 24 months before it lapses, consider making agreements on a new lease now rather than in the next 24 months. In doing so, you’ll be able to determine whether the landlord will renew the agreement or not.
Also, most landlords will insist on holding some security against the rent. This may include an advance payment of two months. If this is the case, agree with the seller on how to treat it. If the seller decides to sell the security to you, ensure you note it somewhere on a formal document.
5. Agree on the “Letter of Intent”
The document aims at spelling the terms and conditions of this sales agreement. The document will state the purchasing price and when to surrender the payment. The document should also specify the assets you’ll buy and the ones that the company will keep.