Buying an Existing Business
Buying an existing business is one way of getting your new venture up and running. Perhaps a business owner is getting ready to retire and wants to pass her shop to someone new, or you have a strong business plan that you think would reinvigorate an existing enterprise. There are many reasons why buying an existing business can be a good option, such as reduced start up costs and time, an existing customer base and pre-existing knowledge of how the business performs.
However, it’s critical to do your due diligence and make sure that the business you’re buying is foundationally sound – for instance, you may not want to buy a business that has many debts that you may owe or need to collect. Also make a clear assessment of what you are buying: does the business come with the building, or is it still being leased? What equipment and assets will be included? For instance, if it’s a restaurant, will you be able to keep the menu and use the recipes? Will you take over the website and have access to the customer mailing lists?
A business broker is a licensed professional for buying and selling businesses. Similar to a real estate broker, they can act as an intermediary between you and the business owner and help you locate a business to purchase, assess the value of the business and negotiate the purchase. Business brokers typically operate on a commission, so make sure that you find someone who you work well with and trust. Depending on the complexity of the purchase, you may also consider hiring an attorney to help you prepare an asset purchase agreement and negotiate the final terms of the transaction.
Things to Consider
There are many things you should consider before purchasing a business. Some key items include:
Inventory and Assets
- Conduct an in-depth assessment of the inventory and other assets – such as furniture, fixtures, equipment and the building – so you can know its condition and value. This approach can also serve as a starting point to determine the value of the business.
Zoning and Permits
- Review the zoning for the property to make sure that the business conforms to the building code and that any changes or alterations you plan to make to the building are allowed within the property’s zoning requirements. Otherwise, you may need to make expensive or time consuming changes. Depending on the business type, you may also verify that the business’s licenses and permits are up to date and review any terms or conditions attached to them. For instance, if the restaurant has a liquor license, you will want to find out if it is transferrable to a new owner.
Contracts, Legal Documents and Loan Information
- Make sure to receive and review any contracts, legal documents, and loan information that the seller has that may impact you as the new business owner. Make sure you are comfortable with the terms, and assess whether you would be able to either terminate, re-negotiate or transfer ownership to yourself. This review may include items such as:
- Leases for the building and/or equipment
- Contracts with suppliers and for equipment maintenance
- Employee contracts, including information about wages and other benefits
- Amounts owed to/by suppliers or other stakeholders
Reputation and Relationships
- Review information that’s publicly available about the business such as whether there have been any complaints with the Better Business Bureau, and how well the business is represented online.
- Talk with customers, employees and vendors to get an in-person assessment of how strong the relationships are, how well you think you would work together, and how well the business is doing.
Tax Returns, Financial Statements, and Sales Records for the Past Five Years
- Request all financial documents, including financial statements, accounts payable/receivable and tax returns, for the past three to five years. This will help you determine the profitability of the business, if there are any outstanding tax liabilities, and the actual financial net worth of the business. You may need to enter into a confidentiality agreement with the business owner to obtain this information.
To protect yourself from having to pay any sales and use taxes owed by the business, you can request a certificate of tax clearance from the State of California Board of Equalization. If you do not obtain a clearance before you buy the business, and if taxes are owed and the previous owner has failed to pay those taxes, you could be required to pay any taxes, interest, and penalties that are due.
Your Business Plan
- Make sure you have a clear goal and understanding of what it means to buy a business. What is your plan to ensure the business becomes or remains profitable? What is the minimum Return on Investment that would make this purchase worthwhile? How will you plan to structure the payment schedule so it's manageable, especially in the first few years when you are getting up and running? Spend the time to put together a business plan.
Once you’ve purchased the business, you'll need to begin the process of registering your business. Many permits, such as a Seller’s Permit do not transfer, and you’ll need to set them up in your name.