10 Things You Must Consider Before Buying A Business
Building a business can be time-consuming. You have to know first what kind your business is before you even start it. If you do not have the time or just want things to go fast, when you are most likely thinking about buying a business. But before you sign on that dotted line, there are few things that you should take into consideration.
Buy the Assets, not the Business
When it comes to buying a business, many sellers will try to get you to buy stock on their business. You do not want to do this, you want to buy the assets instead. Doing this will ensure that you are not gaining any liabilities that the seller might have taken on.
Sales and Payroll Taxes
Make sure that the seller has been staying up to date on all their taxes. Otherwise, the state tax authority can come after you. If the seller has other employees make sure that they are current in their employment tax payments. You can do this by asking the seller what type of payroll service they have been using. Get a clearance letter from the state tax authority. This letter should say that the sellers are current in all of their taxes.
Know who will deal with Accounts Receivable
The reality is that there will be some customers that will still own the seller money on the closing date. There are two different ways that you can handle this:
- You can purchase the accounts receivable at closing time.
- You can also let the seller handle this instead.
Find out if the seller is leasing out the building that they are staying in. If they are, you need to find out how much time is left on the lease, and if the landlord will let you stay without increasing the rent.
Prepaid expenses are typically advertisements that usually covers the whole year. These expenses are not included in the purchase price. They are instead tacked onto the closing price. To avoid any surprises, ask the seller for a list of closing adjustments. Doing this allows you to be able to add this into your business selling budget.
Create a Letter of Intent
Letter of Intent is also known as a term sheet. It is a short agreement that is between the buyer and seller of the business. This letter should also include all of the important terms and conditions that have to do with the sale of the business. For instance, it should include the purchase price, when the price will be paid out, and all the assets that are being sold. These letters are not technically binding, but it will help the lawyers when it comes time to drafting the legal contracts.
Bulk sales law
Bulk sales law is when the buyer of the business has to notify the seller’s creditors of the sale. While the majority of states have gotten rid of these laws, but there are a few that still enforces them. If you are buying a business in one of those states, make sure that you get this done. Otherwise, the seller’s creditors can rescind this transaction. If the seller does not have any creditors you will still have to provide a copy of the the bulk sales notice.
Indemnity from the Seller
An indemnity from the seller means that they are promising to defend any lawsuit and pay all fees and judgments that could take place. This will protect you from any mistakes the previous owners could have done. You should be prepared to give the seller an indemnity as well. Which means that if the seller gets sued for something you do that you cover all those tasks.
Seller sticks around for a short time
In the retail and service industry, customers may have a personal or business relationship with the old owner. To ensure that their customers stick around, see if the seller will make an appearance at the business for a couple weeks. The seller can introduce you to customers, help you with the books, and make sure that the business has a smooth transition. This also gives you the basic knowledge in terms of marketing and advertising — do they have a website already? What are the marketing done and needs to be done? Are there tasks outsourced or bought from other resources such as www.SocialProof.xyz?
Know the Employees
Get to the employees and make sure the “key employees” are going to stick around when you take over. Oftentimes Sellers can be reluctant to tell their employees about the business being sold. This can be avoided with an added provision in the sales contract that stipulates that the Seller will tell their Employees about the sale at a certain time.