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Buying A Business

Many find the idea of running a small business appealing, but lose their motivation after dealing with business plans, investors, and legal issues associated with new startups. For those disheartened by such risky undertakings, buying an existing business is often a simpler and safer alternative.

Purchase 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; 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 may 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 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 by 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 as well as whether any tax liability is outstanding.

Important documents: Numerous documents should be checked during an investigation. They include:

Determining Value

A realistic business valuation requires more then merely looking at last year’s financial statement; it 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.

Most people believe that a business should be sold for Fair Market Value. The term Fair Market Value is defined by the IRS at Rev. Ruling 59-60 as follows:

"the price at which the property would change hands between a willing buyer and willing seller when
the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both
parties having reasonable knowledge of relevant facts."

There are a number of different methods to determine a fair and equitable price for the sale of the business. The following lists a few methods to determine the price:

Sales Agreement

The sales agreement is the key document in buying the business assets or stock of a corporation. It is important to make sure the agreement is accurate and contains all 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 intent to purchase of the business—its assets, customer lists, intellectual property, and goodwill.

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

Due Diligence

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

Closing Checklist

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

The following items should be addressed in a closing:

 

 

 

Taken from http://www.sba.gov/smallbusinessplanner/start/buyabusiness/index.html