Between starting a business from scratch and buying a company, you decide to buy a business. Can you explain why? Let’s say you know you should choose to buy Business Assets because buying ownership means you buy in all the debts. You are brilliant. The further question is, what are the business assets you are buying?
The benefits of buying a business are obvious: existing and future clientele. Those are the results. The goodwill of a company and the tangible concept of intangible business assets you are acquiring go beyond that. A company’s business assets usually consist of tangible assets, such as land, buildings, equipment, and inventories, and intangible assets, such as brand recognition, customer relationships, and technologies.
That said, before you sign a general buy and sell agreement, you need to know precisely what assets are being sold. This involves due diligence work. Business Due Diligence Work involves reviewing and verifying the seller’s financial and managerial documents to determine the real value of the purchase and the risk that comes with it.
The business’s future potential can be measured based on experience and real numbers rather than on financial projections (often overly optimistic).
- An existing business is already generating income, reducing the need for extensive start-up capital.
- An existing business already has trained and knowledgeable employees, current customers, and vendors.
- It is easier to obtain or transfer existing licenses and permits from a business that has them in place than to start the process from square one.
- Banks and other lenders may be more likely to loan money to purchase a going concern with a strong track record instead of capitalizing on a startup venture.
- Some businesses will help finance and train a new owner to keep the operation from stagnating or losing customers during the transition.
Buying a Business – The Team
Suppose you are considering buying a business and assembling an experienced and knowledgeable team to help and advise you. In that case, your team may include a business broker, an accountant, and an attorney.
Your broker – who should be a member in good standing of the Business Brokers of Florida (BBF), the Florida Business Brokers Association (FBBA), or the International Business Brokers Association (IBBA) – will help you locate and acquire the right company at the right price; your accountant will lead you through the due diligence process and advise you on things like taxes and record keeping; and your business attorney will help you with the organizational and legal documentation.
Think of the time you bought your house: you found your real estate agent through the recommendations of friends and family, and then you thoroughly vetted them to make sure that this person knew the business, the market in which you hoped to buy, and the buying process itself. Of course, your agent also made sure to quiz you on all the essential topics: where you wanted to live, what kind of house you were looking for, how much you could afford, what your financing options were, etc.
In much the same way, you will replicate the process with your business broker. You will make sure that they are competent, trustworthy, and professional. In return, your broker will want to know why you want to buy a business, what kind of business you are looking for, where you hope it is located, what your experience is in the field in which you are searching, what you can afford to spend, what financing options you have in mind, etc., etc., etc.
Buying a Business – The Search
Based on your qualifications, desires, and ability to finance a sale, your broker will begin providing you with summaries and financial information from businesses for sale that meet your criteria. (For information about selling a business, click here.) You must sign a Confidentiality Agreement promising not to disclose any proprietary information. Then, you will be put in touch with qualified sellers so that you can tour their facilities and assess their business’s strengths and weaknesses.
Remember that in most cases, buying an existing business needs to be kept confidential from current employees, customers, suppliers, landlords, and lenders. Therefore, it is common for you to tour a prospective business after working hours so that confidentiality remains intact. Premature disclosure of a sale, or even the notion that a business is looking for a new owner, can hurt its existing operations.
Buying a Business – Due Diligence
Once you have decided upon a business to buy, have made an offer that is provisionally accepted, and have a purchase agreement, you will begin the process of due diligence to make sure that the business you are planning to buy is as financially sound as the seller has represented. This is where your accountant and attorney can be beneficial because you must review extensive financial information and many different documents. The bottom line is that before you buy an existing business, you must determine whether you will ultimately make any money from it.
If the business is a corporation, you will need to see its articles of incorporation and all of its past reports. For any business, you will need to examine, at the very least,:
- All of its accounts and financial statements going back at least several years
- Its auditors’ and credit reports
- A schedule of any debts, liabilities, inventory, leased equipment, capital sales and purchases
- An analysis of its expenses and accounting methods
- Copies of leases, deeds, mortgages, titles, and insurance policies
- An accounting of any owned intellectual property, patents, trademarks, and/or copyrights
- A list of all employees, including all salaries, benefits, retirement plans, insurance, workers compensation, and unemployment claims, as well as a history of any labor disputes or pending legal actions
- Copies of all licenses, permits, and governmental correspondence
- All tax records
- All current contracts, marketing and sales agreements, and purchasing policies
- A summary of all existing products or services
- A schedule of the company’s largest customers
- The company’s current advertising programs, marketing budgets, and marketing materials
- The company’s professional associations, including law and accounting firms and any other similar entities engaged by the company
- All news articles and publicity materials relating to the company
In addition, Florida law places the burden upon a buyer to ensure that the seller has paid all of the business’s sales taxes.
Other items you may want to consider include:
- Whether or not you will be able to obtain some amount of financing from the seller
- Having a non-competition clause in place preventing the seller from competing with the business after the sale
- Whether the seller will agree to train the new buyer on how to run the business effectively
- Having the right to terminate the purchase agreement for any reason during the due diligence period with a fully refundable deposit that is kept in escrow pending closing