Ask the Right Questions When Buying a Business
From the beginning, when buying a business, determine whether you’ll be purchasing the assets rather than the business itself. If the current owner is an LLC or corporation, offer to buy the assets related to the business, rather than shares of stock, and establish a new company as the official purchaser. By doing this, you will be treated more favorably at tax time, because your “tax basis” regarding those assets will be what you paid for them. In addition, if the seller is being sued by anyone or has debts to pay, those liabilities will not be your problem if you take that step.
Dealing with tax issues
Note that, in many cases, even when you buy a business’s assets, the state’s taxing authority can approach you if they discover that the seller owed use, sales, payroll or other commercial taxes. In addition, if the business has employees, find out if the owner used a payroll service and whether the required employment tax payments have been made. Follow up by having the state taxing authority send you a “clearance letter” stating that the previous owner is current on all use and sales taxes as of the closing date. If the seller is leasing commercial property, you will need the following information:
- when the lease will expire
- whether the landlord will allow you to assume the lease without increasing the rent, and
- whether the landlord also holds a security deposit, which may be included in the purchase price.
Obtain a “letter of intent“
This brief agreement between both parties in a business sale, also known as a “term sheet,” describes all of the major terms and conditions related to the sale of a business. It will indicate the purchase price, the circumstances related to paying the purchase price, the assets being sold, the terms contained in the noncompete agreement, and other issues related to the sale.
This is also the time to decide who is going to handle accounts receivable. It is likely that some customers will owe the business money when closing day arrives, and you can either buy the accounts receivable at that time or leave their collection up to the seller. Buying the accounts receivable is the best course to pursue, because you will be in a better bargaining position with delinquent customers who plan on doing business with you.
Prepare for a smooth transition
Remember that in a typical service or retail business, the owner has both a personal and a business relationship with the customers. After closing the deal, try to have the seller on hand for a few weeks to present you to the customers, assist you with record keeping, and help in ensuring an orderly transfer of ownership. You may even want to pay the former owner for doing you this favor because it is such an essential part of getting off to a good start as the new owner.
Dealing with the staff
Entrepreneurs who buy businesses always ensure that any “key employees” plan to stay with the business because they are usually the ones who deal with customers on a daily basis and know what it takes to keep things running smoothly.Many business owners hesitate to tell their workers that the business is on the market because they don’t want to deal with a mass exodus. With that in mind, you can agree to make a general announcement about the sale two days prior to the closing. Then, arrange to meet with every employee privately to determine their willingness to remain with the business as the ownership changes. You can also include a provision that would allow you to refuse the deal if you are unconvinced that they will stay with the business for a reasonable amount of time.
Searching for a Business for Sale
The easiest way to start your search for a business to buy is online. There are mulitple business for sale websites such as www.BizListings.com.au which allow you to conduct your search via secific criteria such as location, industry and price. You can also find additional information at www.business.gov.au.
Always seek legal advice prior to any purchase.