CHECKLIST FOR BUYING A BUSINESS
When buying a business the following deal points should be
covered before moving forward to closing the transaction:
● Always Buy Assets, Not Shares
of an Entity. If the business is owned by an entity, such as an LLC
or a corporation, a buyer should refrain from purchasing shares or interests in
the entity. Instead, the buyer should purchase the assets, such as goodwill,
inventory, equipment and intangibles. This shields the buyer from liabilities,
creditors, claims by disgruntled employees, etc. of the selling entity, and
will generally increase future tax deductions for depreciation and
amortization.
● Study the Financial Statements.
The buyer should examine the seller’s financial statements (or at least the tax
returns) to verify the gross sales, salaries to owners, etc. Be wary of sellers
who contend that the business is worth more than its tax returns would indicate
because of unreported income. Remember, you need to be comfortable with the
cash flow of the business that will reach you as the new owner. If you can’t
recast the financial statement to determine the discretionary cash flow being
produced, work with a business broker who can do this for you.
● Get a Non-Compete Covenant from
the Seller. It makes no sense to buy a business only to have the
value eroded by the seller starting a competing business. You can eliminate
this risk by having the seller sign a non-compete agreement, which prevents the
seller from competing for a reasonable period of time. Non-compete agreement
can have unique differences based on particular industries, so ensure that this
is also a part of your research.
● Research the Price.
The value of most businesses is a multiple of annual gross sales, or profits
disbursed to the owner. You can usually search for listing prices of similar
businesses on the internet. Do your homework before you make an offer. However,
remember a business broker will have access to data on what similar businesses
sold for in your market, state, and nationally.
● Search for Liens. This
is critical during due diligence. Sometimes the seller hasn’t fully paid for
the equipment it is selling. Instead, the seller has mortgaged the equipment,
and the lender has the right to repossess it if the debt is not paid. The
lender’s right to repossess the equipment remains intact even if the equipment
is sold. The solution is to do a UCC search for liens, and either insist that
the secured debts be paid off at closing or the balance due be allowed as an
offset against the purchase price.
● Inspect the Equipment.
Equipment is usually sold “as is,” so the buyer needs to determine if the
equipment is broken or worn out. It may be necessary to hire an inspector.
Along the same lines, the buyer should confirm that the seller has transferable
licenses for any software used in the business. If the software has been
pirated or the licenses are not transferable, the buyer may be liable if it
uses the software.
● Decide on Payment Terms.
Usually for the seller, terms are more important than the final price. If you
cannot pay cash for the business (and most buyers cannot), your offer needs to
specify the down payment, monthly installments and interest rate.
● Do You Have Sufficient Cash?
Many businesses fail because the buyer does not have sufficient cash to get the
business started. This is especially true if there are up-front costs, and
sales receipts lag weeks or months behind. For example, will you spend funds on
remodeling or employee training before the business opens?
● Investigate the Lease.
Without the lease of the premises, the business may have little value. Actually,
many deal fail to close because of lease issues.It will be necessary for the
buyer to either assume the seller’s lease or perhaps sublease from the seller.
In either event, it will be necessary to obtain the landlord’s consent, which
should be done in advance.
● Ensure Smooth Transition.
Unless the buyer is thoroughly familiar with the business (as an employee,
etc.), the sales agreement should contain a commitment from the seller that it
will demonstrate use of the equipment, introduce the buyer to the customers,
and answer various other questions unique to the business. Usually a minimum
number of seller consulting hours are included in the price of the business,
and hours in excess of this threshold are billed to buyer at an hourly rate.
● Agree on Accounts Receivable.
It is unusual for a buyer to purchase the seller’s accounts receivable. A more
common approach is for the buyer to collect seller’s receivables and remit them
to the seller. The buyer is usually allowed a fee of perhaps 10% to cover the
overhead involved in collecting the receivables and remitting them to the
seller.
● Use an Entity. If
you are buying assets, the buyer should be a corporation or LLC owned by you.
Using an entity will help avoid personal liability for debts of the business.
The seller and landlord will normally insist on personal guarantees, but the
entity will provide protection from other creditors.
For a complimentary consultation:
Contact Cecil Williams (cecil@bizbrokerflorida.com) or call at 888-925-5055 ext.206. Visit my personal website to search for business for sale in Florida www.bizbrokerflorida.com Also, visit our Florida Business Exchange website at www.fbxbrokers.com
