It’s usually easier to buy an existing business than to start up your own. This is because everything is already in place, including a customer base. However, there are some things to look for when you buy a fully-operational business. Follow the tips listed below to give yourself a fair chance of success at converting someone else’s business into your own.
What to look for when buying an existing business
Purchase the assets, not the shares of the business
If you’re buying from a corporation or an LLC entity, it is usually better to buy the business assets rather than the shares of the company. An asset purchase usually sets you up for better tax treatment, and avoids inadvertent assumption of the company’s liabilities. Of course there are exceptions to this general rule.
Check on sales and payroll taxes
Make sure that the seller is up to date on the payment of all taxes, particularly unemployment withholding taxes and sales tax. Typically you want to obtain a tax clearance certificate from the taxing authority or negotiate a hold back and indemnity from the seller to make sure you have no successor liability for seller’s unpaid taxes.
If you are buying accounts receivable, make sure they are collectible.
Typically you will want to make your purchase look seamless to the company’s customers and vendors, including the regular receipt of account receivable payments from them. Purchasing the receivables helps to accomplish this goal, however make sure that the accounts receivable that you purchase are collectible. Typically some form of discount or offset to the purchase price is a fair way to handle questionable receivables. Sometimes you will not want to buy the accounts receivable from the seller and the seller collects them after the sale and retains the proceeds.
Assuming the commercial lease
If the business location is valuable, then you probably want to assume the lease to maintain the business goodwill at exists at that location. Review the commercial lease to determine the terms and make sure the terms work for you. If yes, then you and the seller will need to approach the landlord to obtain consent to an assignment or sublease. This is also the time to seek an extension of the commercial lease if you like the location. This is also the time to determine if you prefer to move the business to another location, in which case the remaining term and alternative locations should be considered.
Insist on a letter of intent
The letter of intent, while optional and non-binding, is an excellent way to come to terms on all important aspects of the sale before retaining an attorney to draft the transaction documents.
Obtain legal advice
You will of course want to have a lawyer to provide legal advice and guidance throughout the process, and that means you should contact a legal team which is well-versed in business law and commercial law.
Bay Area Lawyers specializing in commercial and business law
Poniatowski Leding Parikh Law Corporation in the San Francisco Bay Area is one of the leading firms for handling all matters related to business and real estate law. With over 58 years of combined experience in business law, you can trust the lawyers at PLP to leave no stone unturned in representing you and your new business. For further information contact one of our offices below or contact us online.