Buying a pre-existing business can be an appealing investment. A proven business with history of returns has less risk than starting from scratch and easier to obtain business loans. However, it is still essential to consider potential liabilities. For example, find out if the business has consistently adhered to tax law. Are there any contracts that are to expire? Do you have a non compete agreement in place? Is their insurance adequate? If there are commercial leases or equipment leases, what are the terms?
Our checklist will help you hone in on legal aspects and areas you should investigate before pursuing commercial loans to buy a business.
1) Research
Your first step is the most involved. Before anything else, you should conduct detailed research to pinpoint what business is the best option for purchase. Once you have picked the right business, examine the fine details. The more prying you do, the better.
Consider the following areas:
a) Finances
The business’s finances should be under high scrutiny. You want to avoid businesses that are carrying too much debt. It is best to work with an accountant and go over financial statements with a fine tooth comb. Make sure the financial statements are certified by a public accountant and signed by the principles of the business. Take note of outstanding debts, liens, and delinquent account receivables. Even look at the sales tax records and bank statements. Be clear on state laws regarding your liability for unpaid taxes after a change of ownership.
b) Legal Matters
Investigate the obligations the business you want to buy has. Familiarize yourself with their compliance with legal matters including:
- Contracts
- Policies
- Permits
- Employee contracts
- Intellectual property rights
- Licensing
Speak with neighbors, clients, business partners, etc. Also, ensure any commercial leases can be transferred.
c) Employees
Employees are a crucial part of how efficient, productive and profitable a business can be. Do not put off reviewing employee records and HR related information. Review all no-compete agreements or other applicable documentation and have your lawyer review them as well.
Do not assume employees will be transferred to you. Have plans to address the matter in negotiations. Be aware of state laws regarding employee protection and any calendar notice regulations for termination or during sales. Be sure you are set to obtain an Employer Identification Number.
d) Structure
The legal and tax obligations of the business will vary. If the business is highly regulated, be sure they are in compliance across the board.
Be prepared to sign an NDA. This is for the protection of the business. The seller may want to be comfortable you will not use their business’s information for anything but consideration of the sale
2) Be Clear on What You Are Purchasing
Businesses are not always sold whole. They can also be sold as assets of the business. Savvy buyers tend to lean toward asset-based transactions. Such purchases mean the obligations and debts of the business would be the responsibility of the seller. You should have the terms of the sale clearly stated in writing. Also, know that you do not have to purchase all the business’s assets, so feel free to be selective. Make sure that intellectual property is transferable to you.
3) Form A New Legal Entity?
You should have a discussion with your lawyer about if you should form a new legal entity. The entity would acquire the assets of the purchased business. The general rule is that there is greater protection when you form a corporation or an LLC. You will minimize your personal risk for any previous obligations the business has but purchasing the existing corporation also has it’s benefits.
4) Write A Letter Of Intent
Once you are clear on all the terms of the purchase, you will need to create a letter of intent. The document is not binding. However, it is an agreement that defines what should occur once you and the seller have agreed on the final terms of the sale.
5) Negotiating Terms
AS IS Loans is an excellent resource for garnering information on negotiating the purchase of a business. A key factor is assessing a fair dollar amount for the sale. Once you have done that, you will need to consult your lawyer. He or she will draft the sales agreement. When all points are flushed out and mutually accepted you will sign. You should be assertive about getting the transaction into escrow whenever there is a concern other buyers may come to the table.
You will be in a better position to obtain business loans if you are obviously versed properly to conduct an acquisition. It is also a protection to you to be meticulous about such a major decision. When executed correctly, purchasing a business can be a wise investment choice.
Business Loans from “AS IS” Loans
At AS IS Loans, we offer flexible solutions for all your real estate and business needs. There are no denials. We will find a solution for your business whether you have been in business for years or just starting. We provide free consultation and develop customized a business loans or funding plans, regardless of your credit score.
