Things to Note Before Buying a Business
Buying a business may appear to be an easy task; given all that you need to do is shell out that stocked money from your account. But it’s easier said than done. There are many things that need to be considered before you take such a leap and it is this time where you sit down to take note all those important things that can either prove to be favourable for you or the complete opposite. It is therefore very essential that you consider all of these ways before you crack the final deal as it is here is where the actual challenge lies.
Well established or start-up?
The culture in the field of purchase of a business has been more inclined towards buying those businesses that are already in existence with all its trained employees, an established and loyal customer base along with an already existing medium of receiving the regular in-flow of cash which are not only sufficient to keep your business running but are also enough to fulfil your need for a decent standard of living. These reasons are more than sufficient for many to purchase an already existing business. But the question remains, how will you find the business you are looking for? No seller of a business is going to put out a ‘For Sale’ board or an advertisement to publicise his interest in selling his business. In such situations, it is recommended that you hire a business broker who is a complete professional and has a good knowledge of his work as it is he who will be able to provide you first-hand information in case any seller is interested. After taking into consideration these steps, another important step is that you make a definite choice regarding the business, whether it is this particular business that interests you. Does the business that you are considering to buy is the kind that you like and have a keen interest in? Do you possess the required skills to run that particular kind of business? Because, irrespective of you being highly qualified, if you do not enjoy your work, you are unlikely to succeed.
Few of the other important things to note before buying a business are its location, the previous business records of the company like its trends of the sales concluded so far and other important information needs to be documented and considered, and the prevailing system of management in the company of your interest. Take all necessary steps like a meeting with the seller, a thorough study of the documents, past records, financial records of the company and the representations made by the seller, employee and customer reviews, etc. before you make your final decision.
In cases where the seller is a corporation or an LLC, You need to ascertain that you are buying the assets of the business and not the business. Under no circumstances should you give in to buying the stocks of the company because the purchase of the assets gives you a better tax treatment benefit and also your liability does not arise in any kind of a legal suit like repayment of debt etc.
You must also pre-negotiate with the seller the terms dealing with the pending accounts. There may be a few customers who owe money to the seller. You need to make an agreement with the seller to either purchase the accounts receivable at closing or you could agree to let the seller collect them. However, it is recommended that you buy the accounts receivable as in this way you have a good chance to crack another subsequent deal with the customer once he has paid off the debt and thereby continuing to retain the company’s customers.
You should be clear about whether the building is the seller’s own property or has he acquired it by lease, or on rent. In case the building is on lease you need to make sure that the date of expiry of that lease is at a period of a minimum 5-10 year away.
The letter of intent should be thoroughly examined and negotiated. A letter of intent also known as a ‘term-sheet’ is a short agreement between a buyer and the seller of a business that expressly cites all the important terms and conditions that are to be mutually agreed by both the parties in order to conclude a deal. The clauses mainly are in relation to things such as the price of selling the business, the medium and the time of payment of the price, the assets to be sold or retained by the seller, terms related to the seller’s agreement for non-compete and other such important things. Many may argue that why waste the time on negotiating on LOI’s when they aren’t the binding document. However, it is worthy to note that such negotiations make it clear for both the parties about the needs and requirements, the aims and motives and furthermore, it will help your lawyers draft a more definitive agreement.
Ascertain that the seller’s creditors are notified of the transaction in process as on failing to do so may give the creditor’s the power to rescind the transaction in order to hinder the sale of the seller’s assets. Also get an indemnity from the seller for those situations where you are being sued for some act that is done by the seller and you may have overlooked it at the time of buying the business. Getting an indemnity from the seller shields you from having to pay the hefty sums of money spent on defending your business in a lawsuit and the damages and compensation that the judgement holds you liable to pay.
You should also take into consideration the price of the business. By the term price, we mean not only the purchasing price of the business, but the final cost of buying that business. There are things which require to be evaluated such as the total costs, profits, assets, liabilities, taxes, sales, legal issues. You must work out the total valuation of the business and estimate the total worth of the business before you write off that final check to purchase the business.