Buying A Business? Use This Checklist

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