Tips on Buying an Existing Small Business
Starting a small business is risky business. According to the Small Business Administration, only half of new businesses survive past five years. Sometimes an entrepreneur can skip some of the hassles of a new business start-up by Buying an Existing Small Business. Although buying an existing business might be less risky than starting a new one, the purchaser has to be certain to do his or her homework and to make sure that he or she negotiates a comprehensive purchase agreement. A purchase agreement (or a Purchase and Sales Agreement) is an absolute necessity for all parties and should never be just a the routine residential form used by real estate agents. There is much more to purchasing a business than the real estate and the purchase agreement needs to be carefully drafted and negotiated by both sides.
When considering buying a business, there are many issues that need to be addressed. You will want to put together a team of trusted advisors including an attorney, accountant or CPA, a banker and, in some cases, a business broker. An attorney can assist you by asking the key questions and focusing on the areas that will have the greatest impact on the business’s future success. For example, what parts of the business should you buy? Is it better to buy the existing business entity or should a new entity be formed to only purchase the assets? Buying the business entity entails buying the corporation or limited liability company. If you do this, you inherit not only the assets and existing contracts, but also the debts and liabilities of the business. It is hard to predict what is lurking beneath the surface, such as bad debt, personal injury claims, and liabilities, etc. It is normally better to simply buy the “assets” of the seller. Buying the assets means that you buy the tangible items like the equipment and property, but you don’t take over the seller’s entity. You must create a new company with its own financing and enter into your own leases and contracts as if the seller’s business no longer exists.
Before you execute a purchase and sale agreement, you will want to engage in “due diligence” to make sure that the business is profitable and whether or not it is going to be a good investment. Depending on the type of business you are buying you will want to look at: profit and loss statements from prior years; projected financial statements; tax returns; cancelled checks, etc. You will want to spend a lot of time learning as much about the business as you can. Your attorney and accountant can advise you through this fact intensive process and help you determine the real value of what you are buying and determine how best to structure the transaction.
When buying a business, there is frequently a concern that the previous owner will form a new competing business. To solve this potential, an attorney can draft a Covenant not to Compete to restrict the prior owner from becoming a competitor for a determined amount of time.
Buying a business without a comprehensive sales agreement exposes you and your business to financial risk. With the help of an experienced business attorney, you can limit your risks by having someone who can help guide you through the due diligence process and help you negotiate a favorable purchase agreement that protects your business interests.