Make sure you're buying the assets, not the business.If the seller is a corporation or LLC, under no circumstances should you buy stock in his business. Instead, offer to buy the assets of the business, and form a separate company to act as the purchaser. Why Two reasons. First, 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, long ago. Second, if he owes money to people or is being sued by someone, you won't assume any of those liabilities if you buy the assets.
Are there prepaid expensesTake Yellow Pages advertising, for example. When you buy a Yellow Pages ad, you normally pay for a whole year in advance. Chances are your closing will take place sometime during the year, and the seller will want to be reimbursed for the portion of the year when you're running the business and benefiting from the Yellow Pages ad. Prepaid expenses--like the seller's security deposit--usually aren't included in the agreed-upon purchase price but are tacked on at the closing. Ask the seller now for a list of \"closing adjustments\"--amounts the seller has prepaid that will have to be \"pro rated\"--so you can budget for them accordingly and there'll be no nasty surprises at the closing.
Negotiate a \"letter of intent.\"Also called a \"term sheet,\" a letter of intent (or LOI) is a short, two- or three-page agreement between the buyer and seller of a business that spells out all the important terms and conditions of the sale. For example, it will include the purchase price, how and when the purchase price will be paid, the assets that will be sold to the buyer (and those the seller will keep for his own use), the terms of the seller's noncompete agreement, and so forth.
Make sure the seller sticks around for a while.In many retail and service businesses, the customers have a personal as well as business relationship with the owner. Be sure the seller continues to make an appearance 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.\" Consider paying the seller for his time so he has an incentive to stay off the golf course--at least until you're comfortable you know what you're doing.
Get to know the employees.Before you buy a business, make sure the \"key employees\" are willing to stick around, since they're often the ones who see the customers day to day, operate all the tricky machinery and know \"where the bodies are buried.\" Many sellers will be reluctant 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: \"Seller and Buyer will announce the proposed sale to all employees of the Business within forty-eight hours before the Closing, and Buyer will be given a reasonable opportunity to meet with each employee individually before the closing date to determine, to Buyer's reasonable satisfaction, the employee's willingness to continue working for the Business.\" Then add a provision allowing you to walk from the deal if you're not totally satisfied that the key employees will stay on board at least long enough for you to learn what they already know.
During the due diligence process, get as much information on the business as necessary in order to make an informed decision. These are some of the due diligence areas to be explored: reputational, business license, anti-money laundering/know your customer, negative news, and industry-specific research.
There is a lot involved in buying an existing business. To help you evaluate the business and reduce risk, get professional assistance from an accountant, lawyer, and a business valuation professional.
If you've decided that business acquisition is the right path for you, then it's important to know what questions to ask. Many deals can seem great at face value, but once you dig a little deeper you realize that one aspect or another of the business makes it an unattractive target.
You can access all of this training through our Accelerator Program. If you'd like to learn more about how we can help you buy your own business, schedule a free 30-minute consultation call with our resident acquisition entrepreneur Daniel Elizondo now. As a business owner himself and an Acquira Success Coach, Daniel will be happy to answer questions you have about the business buying journey.
At Acquira, part of our in-depth training is learning how to filter through good and bad business brokers on the way to buying your own business. You can learn more about that by signing up for the Accelerator Program.
Remember to look further for more information. The Certificate of Good Standing is NOT proof that the business has satisfied all tax obligations.Find Out Information on Current and Past Advertising CostsThose costs are a business expense. The costs may have been a lot higher when the business launched.Do a Valuation and Find Out the Financial Net Worth of the CompanyYou can calculate the net worth by subtracting the total liabilities from the total assets. This information may be included in analyst reports provided by the seller.Make sure the method of calculating the valuation is valid. To properly calculate this information, you may need to hire a professional to do the business valuation.Look at Tax Returns and Credit ReportsYou can request the tax returns. You can get credit reports from various entities such as Dun & Bradstreet, Equifax, Experian and others.View Income StatementsIncome statements include revenues and gains, as well as expenses and losses.
Before you commit to buying you should determine the current value of the business and its potential growth. You may also want to get a professional valuation of the business's assets and liabilities.
You need to assess what is for sale, and what you are interested in. Particularly if you are buying part of the business, you may find other interconnected parts that are not part of the offer that would make the purchase much more profitable for you. In other words, you need to identify what is on the table, but also what is not on the table that could affect how good the deal is.
that the vendor has the legal right to sell the business and the ability to do so (i.e. he owns it outright and there are no more owners or decision makers who could veto his decision). If you are buying a company or the business from a company, you can do this by looking at the registers lodged at Companies House.
Consider existing employees carefully. Normally a new business owner has to continue to employ the existing staff on their current terms and conditions under rules known as the Transfer of Undertakings (Protection of Employment) Regulations (or TUPE). An explanation can be found here.
Remember any documents you see are highly confidential. Many of the business' employees may not know the business is up for sale. Once you have bought a business you need to comply with TUPE and other employment laws.
Additionally, you can use the information you get from Billdu to create sales projections extending far into the future, and you can show these to your potential buyers. This shows your business in the right light, proving that it is a well organised and stable investment, and buyers are more likely to take you seriously as a result. Billdu also allows you to track and print individual or batch income documents, so you have these all ready to go when you meet with your buyer.
It may be the main reason why an owner is trying to sell. They have had a good run over the last five to 10 years when the industry was buoyant, and now with emergence of eCommerce, they are struggling to grow that business. Do your research on where the industry is going in the next two to three years. This includes closely monitoring any existing and potential competitors in the space.
So you've found a business you want to purchase, and now you want to know if buying it is a good idea. The first thing you should consider is the price of the business. To find out if a business's price is fair, you will need to consider the following aspects, which can help you to determine the value of the business you want to buy.
Good web design and web development services can cost thousands of dollars to implement. If you don't need to do anything to keep the business operational, that's a major asset for the business. If you are thinking of buying an online business that needs work in terms of design or on the back end, you will need a good resource who can help you with your technology needs.
One advantage of buying an existing business is, you will have a clear idea of how much money you can make based on the previous owner's sales. This makes the venture less risky from the get-go. Ask to see proof of revenue, based on net sales. In other words, if a business makes $100K a year in sales but the business costs $110K a year to run, it's not profitable. From this perspective, high sales don't always mean profit. You should also ask to see a proof of sales for previous years to see if sales are increasing, decreasing, or holding steady. Weak sales aren't necessarily a deal breaker if you think you can turn things around. However, they will affect the value of the business.
In most cases, when you buy an existing business, you pay a set amount for the entire business. This includes all land, buildings, inventory, and accounts receivable tied to the business's operation. That being said, you can also make arrangements to buy the business's assets only. Why would you do this Because buying an existing business is risky! In fact, if the seller owes money or is being sued by someone, you can protect yourself by forming a separate company and only purchasing the business assets you want to acquire. Whichever route you decide to take, you'll want to make sure all individual asset prices are outlined in the sale agreement. These prices should be reasonable to reflect the fair market value (FMV) of each business asset. If the price you paid for the business is more than the value of its assets, the difference will be considered an amount assigned to goodwill. You can figure out this amount by outlining the value of each business asset as follows: [table id=21 /] In the past, amounts assigned to goodwill were classified as capital expenditures in the eyes of the CRA. But, as of January 1, 2017, all property that provides a lasting benefit but that does not physically exist is classified as depreciable property. This means that you can claim any amounts assigned to goodwill on your taxes under Capital Cost Allowance class 14.1 at a rate of 5% per year. Any land or buildings involved in your purchase will also be eligible for CCA. Conversely, amounts paid for inventory and accounts receivable will fall under annual business expenses. 59ce067264