When you’re considering buying a business to take it over or to merge it into your existing operations, there are many considerations. Certainly, you want to avoid pitfalls like hidden problems and holes in the finances but there are also other things to worry about like the quality of the staff.
Here are 4 things to look at when mulling over whether to buy a business or not.
Buy the Assets, Not the Whole Business
It might seem a little strange, but you shouldn’t buy the complete business by acquiring stock in the limited liability company or corporation. Create a new company to acquire the assets of the business instead. The reasons for this is twofold:
- Your tax basis for the purchase is the amount you paid, not what the business cost years ago
- If there’s a lawsuit or creditors in the woodwork who’ll want money from the business, you have no liability for that
While huge corporations often receive buyout offers where the public shares have changed hands, when buying smaller businesses, it’s best to approach things differently. Seek professional advice to structure things in your favor.
Is the Lease Assumable?
The business operates out of somewhere. For existing premises with rent to pay and an existing lease, you should check whether the lease is assumable by another party? The lease might be assumed on an “as is” basis which means there is no hike in the cost already negotiated, but otherwise new charges could be tacked on.
Is there a considerable amount of time left on the lease or could you be facing a steep price hike once the lease is finished? Will the terms be changed to be less favorable when a new lease is presented? Having to relocate an established business, depending what it is, could adversely affect its future prospects. Also, when there’s a security deposit being held and included in the business purchase price, verify whether there’s property damage, repairs and maintenance or other costs that will reduce the amount that is returnable by the landlord.
Sales Tax and Payroll Tax Current?
It’s state dependent whether the previous business owner retains liability for state taxes on payroll, sales and other types or if a buyer is liable. When a payroll service was being used, you need to check whether the payments are current to the tax authorities and to the employees too.
Managing overheads is important for any business. The tax liability is just one of the issues that a business can be sheltering. To learn more about managing overheads well and looking for problem ones with a buyout, read more at overheadwatch.com.
Get a Letter of Intent
A letter of intent, otherwise known as a term sheet, is a short agreement that lays out what is expected between the seller and the buyer of a business. The document covers the basic terms agreed and main points as part of the overall deal. They’re not binding under law, but are often used to create a basic understanding between the two parties before more format legal contracts are drawn up. Using them avoids simple misunderstandings by getting the significant deal points down on paper.
Buying a business is an exciting thing to do. It’s easy to get wrapped up in the anticipation of taking ownership of a business without doing the due diligence first. You should take it step-by-step and make use of professionals who have previous experience with business acquisitions.