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Buying a Business?

The idea of running a small business appeals to many would-be entrepreneurs. But the fantasy often loses its allure when faced with the realities of dealing with business plans, investors, branding, and legal issues. For those disheartened by such risky undertakings, buying an existing business is often a viable alternative.

Choosing a Business
Research
Purchasing Strategy
Pre-Closing
Closing

Choosing a Business
Finding profitable businesses for sale at reasonable prices can be difficult. Business owners often have an inflated idea of the market value of the business. There are, however, many resources for finding profitable businesses for sale.

Advantages
Among the many favorable aspects to buying an existing business is the drastic reduction in start-up costs. In addition, cash flow may be immediate because of existing inventory and receivables. Other positive side effects include existing goodwill and easier financing opportunities, assuming the business has a positive track record.

Disadvantages
Among the biggest downsides to buying a small business is the initial purchasing cost. Because developing the business concept, customer base, brands and other fundamental work has already been done, the costs of acquiring an existing business may greater then starting up a new business. Other possible disadvantages include hidden problems associated with the business and receivables that are valued at the time of purchase, but later turn out to be non-collectable.

Personal Considerations
It's important to examine your skills, talents, interests, lifestyle needs and resources before purchasing. Do you have what it takes to step in as the owner? Do you have the time and desire? It is also important to examine what special skills you can or can't bring to the business.

Resources
Chambers of Commerce can be helpful in helping determine the type of business options available. Once you've determined the type of industry you're interested in, Trade Associations can be good places to find businesses for sale. More obvious examples include the classified sections of newspapers and Internet directories. Finally business brokers, often local real estate agents who specialize in the sale of businesses, can match business sellers with potential buyers

Buying a Franchise
While an independent business offers freedom of choice, franchises offer the security of working with a known product or service as well as the expertise of the franchise owner.

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Research
Once you've found a business that you would like to buy, it's important to conduct a hard, objective investigation. Look into every aspect of the business, verifying whether the owner's stated reasons for selling are legitimate, and double check every detail for accuracy.

Professional Help
A qualified attorney should be enlisted to help review the legal and organizational documents of the business you are planning to purchase. An accountant can help do a proper evaluation of the financial condition of the business.

Letter of Intent
A letter of intent usually creates a non-binding offer to purchase the business, and is usually needed in order for the seller to provide sensitive information about the business. It should spell out the proposed price, terms, and conditions for the sale of the business. The letter should also state that either side can revise or quit for any reason.

Confidentiality Agreement
Often required by the seller, a confidentiality agreement indicates that you won't use the information about the seller's business for any purpose other than making the decision to buy.

Contracts and Leases
It's important to discover all the obligations that the business is subject to. Also be aware that you may also have to work with the current landlord to assume any existing lease on the business premises or negotiate a new lease. If you acquire an existing lease from another lessee, you may have to pay the previous lessee for the privilege. The cost of acquiring your lease may be amortized over the remaining term of the lease.

Financial Statements
Examine the financial statements from the business for at least the past three to five years. Also make sure that the statements are accompanied with an audit letter from a reputable CPA firm. Don't accept a simple financial review by the business itself.

Tax Returns
Review the business' tax returns from the past three to five years. This will help you determine the profitability of the business and also determine whether any tax liability is outstanding.

Important Documents
Here are the numerous documents that should be obtained and reviewed. They include:

• Three to five years of business income tax returns
• Three to five years monthly income/expense statements
• Three to five years annual balance sheets
• Current tax assessed value of the real estate
• Recent appraised value of the real estate
• A documented outside evaluation/inspection of the key features of the building that includes:
  • The heating and cooling system
  • The electrical system
  • The plumbing
  • The roof and drainage
  • The foundation and structure soundness
• A List of equipment and fixtures, age, condition and appraised value
• A list of the supplies and/or retail inventory with a close estimate of wholesale cost and age and/or Inventory receipts.
• Customer lists
• Sales records and three to five years of sales tax returns
• The supplier/purchaser list
• Any contracts
• Any lease agreements
• Advertisement and promotional materials
• Organization charts and a list of employees and a list of owners
• Payroll, benefits and employee pension/profit sharing information
• Certifications and licenses issued by federal, state or local entities

The buyer should be prepared to provide to the financial officer who is assisting with the purchase, copies of the following additional documents to review:

• A current, personal, financial statement showing what is owed (liabilities) and what is owned that has cash or resale value (assets).
• A current credit report.
• The last 2-3 years of income tax returns.
• A resume.
• A business plan, prepared for the business that is being purchased, that contains:
  • A description of how the business will be structured and managed.
  • A research-report on the markets for the business and how they will be reached and sold.
  • A list of initial start-up cost estimates for items and services needed for business launch.
  • Projections/ budgeting estimates for two years of cash flow for the operation.
• A legally prepared and/or legally reviewed document that contains the offer to buy-sell the business.

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Purchasing Strategy
Once you have determined that you want to purchase a business, you must decide on the purchase price. This will depend on a number of factors, including whether you are going to purchase the balance sheet (includes both assets and liabilities) or just the assets.

Business Structure
Once you find a business that you may be interested in, determine what type of legal entity owns the business: Sole Proprietor, Partnership or Corporation. This will affect your purchasing strategy.

Fair Market Value
Most people believe that a business should be sold for fair market value. A valuation requires a thorough analysis of several years of the business operation and an opinion about the future outlook of the industry, the economy and how the subject company will compete. Read more about determining market value.

Goodwill
Goodwill is defined as the characteristics of a business or individual that cause customers to return to that business or person. Goodwill is considered in almost every type of business valuation and clearly contributes to the tangible value of a business.

Sales Agreement
The sales agreement is the key document in buying the business assets or the stock of a corporation. It is important to have an attorney make sure the agreement is accurate and contains all of the terms of the purchase. It would be a good idea to have an attorney review this document. It is in this agreement that you should define everything that you intend to purchase of the business, assets, customer lists, intellectual property and goodwill.

Sales Agreement Checklist
The following is a checklist of items that should be addressed in the agreement:

• Names of Seller, Buyer & Business
• Background information
• Assets being sold
• Purchase price and Allocation of Assets
• Covenant Not to Compete
• Any adjustments to be made
• The Terms of the Agreement and payment terms
• List of inventory included in the sale
• Compliance with the Bulk Sales laws of the state
• Any representation and warranties of the seller
• Any representation and warranties of the buyer
• Determination as to the access to any business information
• Determination as to the running of the business prior to closing
• Contingencies
• Possibilities of having the seller continue as a consultant Fees - including brokers fees
• Date of closing

Financing
It may be important at this time to consider the financing of the purchase. If you have the proceeds in place, then you can proceed to pre-closing activities. If you need to obtain financing, look at options available for loans.

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Pre-Closing

Licenses and Permits
Most businesses need licenses and permits to operate. The type of license or permit you need depends on your industry and the state in which you are located. License and permit requirements also affect where you locate your business, how much you'll have to spend for remodeling and whether or not you'll have to provide off-street parking.

Zoning
It is important to check the zoning requirements for the area where you are acquiring your business. The zoning requirements may affect the type of business that you are intending to operate in a particular area.

Environmental
If you are acquiring real property along with the acquisition of the business, it is important to check the environmental regulations in the area.

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Closing
It is important during the closing to make sure that you have legal counsel available to review all of the documentation necessary for the transfer of the business.

Closing Checklist
The following items should be addressed in a closing:

• Adjust purchase price - This would take care of prorated items such as rent, utilities and inventory up to the time of closing.
• Review documents required to be provided by the seller - These would be a corporate resolution approving the sale, evidence that a corporation is in good standing, any tax releases that may be been promised by the seller. Check with your local department of corporations or secretary of state.
• Signing promissory Note - In some cases the seller will carry back financing, so have an attorney review any Note documentation.
• Security Agreements - These documents may be necessary if you are going to finance your purchase. A Security Agreement lists the assets that will be used for security as a promise for payment of the loan.
• UCC Financing Statements - These documents are recorded with the Iowa Secretary of State. Again, these documents are necessary if you are going to finance your business.
• Lease - If you have agreed to assume an existing lease, you will be required to execute the assumption. Make sure that you have the landlord's concurrence to assumption of the lease. You may instead have negotiated a new lease with the landlord instead of assuming the existing lease.
• Vehicles - If the purchase includes vehicles you may have to execute the transfer documents for the vehicles. You can check with your local department of motor vehicles to determine the correct procedure and necessary forms.
• Bill of Sale - The bill of sale will be proof of the sale of the business and will transfer the ownership of the other tangible business assets not specifically transferred on their own.
• Patents, trademarks and copyrights - May need to execute the necessary forms if part of the transaction.
• Franchise - May have to execute franchise documents if the purchase of the business was a franchise
• Closing or settlement sheet - The closing or settlement sheet will list all financial aspects of the transaction. Everything listed on the settlement should have been negotiated prior to the closing so there should be no surprises.
• Covenant Not to Compete - It is a good idea to have the seller execute this agreement. This will help add to the success of your operation of the business without any interference from the previous owner
• Consultation/Employment Agreement - If seller has agreed to remain on for a prior of time this documentation would be necessary.
• Complete IRS Form 8594, Asset Acquisition Statement - This document will indicate how the purchase was allocated & the amount the various assets. (Important for your tax return)
• Bulk Sale Laws - Make sure that all bulk sale laws have been complied with, in the transfer of the business assets.

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