This is a common question that business owners, entrepreneurs and investors find themselves asking routinely. When comparing buying a business to starting one from scratch, there are several benefits. Often, the business has been around and is already past the lean years when its survivability is still in question. Also, an established business has established relationships with customers, vendors, and the community. Buy buying a business you may also gain access to patents, legal rights, and trademarks you just wouldn’t have if starting out on your own. In many ways, buying a business does seem to put an entrepreneur a few steps ahead of the competition.
But the flipside is that if the established relationships and reputation of the business are not beneficial, positive, or profitable, then your investment would be better spent building something valuable from the ground up. Additionally, purchasing a business outright often costs quite a deal more up front than starting a business, or the business may have debt you don’t know about. Therefore, savvy business owners realize they not only need to decide what sort of investment and risk they are willing to take when it comes to deciding whether or not to purchase or build a business, but the must also do their due diligence in order to ensure they are making the right decision.
It’s Ultimately Your Choice
There is no one else other than yourself with the insight into what it is you want out of a business, how much you have to invest, and the specific options available in your chosen industry or location. Therefore, the decision is ultimately a process of evaluation. Do you have the money to invest in an established business? Is there one that you think you’d like to own? What do you know about this business? What possible hidden issues could there be? Would starting your own similar business provide any clear advantages over purchasing this business outright?
As can be seen from this line of questioning, the only way to make an accurate decision is to perform the due diligence necessary to have the information you’ll need to make that decision. The rest of this post presents options and discusses strategies to help you make the right call when considering purchasing a business.
First things first
So the first thing you need to do is perform a little self-evaluation:
· Start by picking an industry that you understand and would enjoy working in
· Next, consider your individual skills, experiences, and traits. Use these to eliminate businesses you know you won’t enjoy or be able to run properly.
· Now, start to consider logistics. How big of a business do you want? Where should it be located? How much time do you have to devote to making it successful? Do you want a business with multiple locations? Are any of these make or break issues?
Doing some groundwork here gives you a much clearer idea of what you want and don’t want. Then you can begin to prescreen any businesses that meet the basic requirements of size, location etc. that you laid out. To help with this, enlist a Broker who has established relationships with many business owners looking to sell. They can save you time and money in the long run during your search.
Research & Evaluate
Once you have a business or two that you believe you may be interested in purchasing, it’s time to start vetting it. You’ll need your own small business attorney and accountant that you trust. When reviewing any legal or financial documents, do not trust your own knowledge but go to your attorney or accountant and have them review and give you their insight. In this way you can be sure to uncover possible issues before they ruin your investment.
Start your due diligence with a preliminary round of research about the business you are interested in buying. Specifically, find answers to questions like:
· How has the business grown and evolved over time?
· Why is it now for sale?
· What is the current perception of this business in the community and market?
· Does this business have a future? What does that look like?
· Does the business appear as if it can remain profitable for the foreseeable future?
As you acquire and evaluate the answers to these questions, investigate the business’s standings with local and industry specific organizations and associations. Review websites where customers can voice their opinion of the business and look to see if complaints have been filed against the company.
If after researching all this your advisory team still feels the business may be a good purchase, the next step is beginning to determine the value of the business which starts with inquiring about the asking price for the business.
In addition to your initial research on the company, you should also consider property, inventory, equipment, vehicles, trademarks, liabilities, IPs, legal rights, debts, market history, reputation, etc. This is a complex task that will again require the aid of your attorney and accountant. There are three standard approaches to evaluating and determining a fair and equitable price for a business:
1. Asset-Based – In this method, a business’s value is determined by what it would cost to replace its tangible assets. If the earnings don’t represent more than this figure, than at most the business’s value would be that of what tangible assets it has.
2. Market-Based – In this method, the business’s value is determined by examining the ratio of sales, earnings & assets with the companies past totals as well as those of competing businesses.
3. Income-Based – In this method, the business’s value is determine in some way by converting the amount of earnings into some value using various rates depending on the evaluation in question.
Once you’ve completed an evaluation of a business and can determine if you want to purchase it, there are several purchase options to consider as well.
When it comes time to actually sign the dotted line and transfer the ownership of a business you are buying, there are several viable options. Which is best for you depends in large part based upon the specific conditions of the business you are buying:
This agreement gives you temporary rights as the owner of a business. Typically leases have payments and lengths that are stipulated in the lease agreement.
If you cannot afford to purchase a business outright, you may want to have your team try to negotiate a gradual purchase. This allows you to make payments for the business over a longer period of time.
Buy it Outright
Though not always feasible, this is the simplest option where all rights of ownership and payment are transferred immediately.
Since purchasing a business is such a huge investment, it’s important to have a thorough checklist you go over before you make things final. Here’s a list of things to put on your to-do check list before closing on any business:
· Review all documents – You may have researched and gone over these earlier in the negotiation process, but before putting ink to paper, sit down with your business attorney and go over every document. Make sure everything is there, accurate, accounted for. If you have questions, get them answered before signing. This includes Security Agreements, Promissory Notes, UCC Financing Statements, the Lease, Bill of Sale, any Bulk Sale Laws that apply to on-hand inventory, any Franchise Documents (if you are buying a franchise), the Closing Sheet (which lists all the financial aspects of the deal), etc.
· The Sales Agreement – This is the main document that details the purchase and sale of the business. It stipulates what is included in the purchase, the terms of that purchase and the terms of payment.
· The Lease – This needs to not only be reviewed with your attorney, but you must also contact both parties in the lease to ensure it will transfer. This must be done before closing as problems with a lease can sour an otherwise promising purchase.
· Vehicles – If you are purchasing vehicles as part of the purchase of the business, the paperwork transferring ownership of such vehicles must be taken care of as well. The DMV and your attorney are good resources on this.
· Patents, Copyrights, Trademarks – Any of these that belong to the business must transfer to your ownership as well. Ensure these are part of the purchase and review the terms of sale with your attorney to protect yourself from issues on down the line.
· Employment or Consultation Agreement – Often when a business owner sells their business, they agree to stay on for a time in some capacity to help facilitate a smoother transition. Such agreements should be put into writing and reviewed with your attorney prior to closing.
· Non-Compete Agreement – Protecting your investment by asking the seller to sign a non-compete agreement is a prudent step. Review any agreement you sign or have signed by the seller by your attorney first.
· IRS Form 8594 – This is an asset acquisition statement that will detail the important aspects of the purchase and allocated assets for your tax returns.
Still have questions?
Please call us for a free appointment with Miami business attorney Yoel Molina in our Miami office at 305-548-5020.