What to look for when buying a business

The San Luis Obispo business attorneys at Toews Law Group, Inc. believe that having as much information as possible before committing to a new business works in the buyer’s best interest.

Acquiring a business is an investment in the future. It’s important to make sure the business you are considering is on solid ground financially with a good reputation. These factors to examine include:

• The business structure
• Finances
• Liabilities and taxes
• Assets
• Current employees
• How transfer of ownership is to be facilitated
• A letter of intent and an indemnity

The business structure

• Are you buying a partnership interest in the business?
• Are you buying a franchise?
• Is the business a sole proprietorship, a corporation or an LLC?

For a partnership; what is your share of the profit and what are your liabilities? What are your responsibilities and how are the responsibilities of running the business shared?

A franchise comes with some requirements by the parent company, but that may not mean you have to completely surrender to “the corporate way.” There may be room for negotiation about certain aspects and it is critical to be fully aware of your rights and obligations.

If the business is a corporation or an LLC, transfer of ownership needs to be filed with the state and the IRS. Even a sole proprietorship requires registering business licenses and fictitious business names.

Finances

Profit and Loss (P&L) statements provide a high-level view of the financial condition. A glance can show a satisfactory profit, but it is all of the financial components combined that indicate sustainable profit and growth.

But, there are other factors that make the difference between a business that is on solid ground or teetering on the verge of collapse such as the status of sales, and accounts receivable.

• Are projected sales for an upcoming quarter based on actual signed contracts or on estimates from past performance?
• Which accounts receivable are past due, by how long and how much. What are the current plans for getting payment on those accounts?

Anything that calculates into the P&L equation needs to be examined. Having the experienced team of San Luis Obispo business attorneys in your corner is going to give you the best chance to make the right decision.

Liabilities

A close look at the liabilities is just as important the finances. Details that are simmering beneath the surface may not show up on the P&L. A pending court case, a regulatory investigation, or even aged inventory can mean a business headed for trouble.

Liabilities can include:

• Taxes, licenses and fees
• Accounts payable including rent, lease or mortgage payments
• Loan payments
• Liens and pending court cases
• Leases, including real property and equipment
• Purchasing contracts
• Payroll, payroll taxes, and professional services
• Financial obligations to partners
• Utilities, insurance premiums, advertising contracts, memberships and business listings
• Sales expenses

Assets

Assets include cash on hand, bank account balances, investments, the value of inventories, vehicles and the age of vehicles in the fleet, real property, furnishings and equipment, accounts receivable and signed sales contracts.

Inventories can include manufacturing parts and supplies, retail merchandise, office supplies, maintenance supplies such as tools, and anything that has been purchased and stored for a future purpose.

An inventory is not necessarily an asset, especially an aged inventory. The best way to recover the cost of an old, unused inventory is another area where experienced business attorneys are of value.

Current employees

How many full time and part time employees are currently employed?

Who are the key staff, such as managers, supervisors and subject matter experts. What critical jobs are performed in-house or by outside services, such as accounting, janitorial, vehicle fleet maintenance, and others.

Transfer of ownership

Are you planning to be handed the keys just before the old owner flies off to Tahiti or is there going to be a transition period?

A transition period is an opportunity to learn from the previous owner’s experience. Customers, vendors and employees are used to working with the old way of doing things. Keeping operations on a familiar pattern before implementing new process is going to help keep employee and customer confidence.

Decide what role the previous owner is going to play in the transition, for how long, and how he or she is going to be compensated.

Letter of Intent and indemnity

A letter of intent (LOI) is a non-binding agreement between the buyer and seller that describes important terms and conditions of the sale. The LOI includes the purchase price, how and when the price will be paid, assets that are being sold to the buyer and assets the owner is keeping, and more.

Even though the LOI is nonbinding in terms of actually following through with the purchase, it also contains an expected date when the purchase will be formalized and a process for withdrawing any offer and not completing the sale.

Additional documents include:

• An indemnity from the seller promising to defend any lawsuit and pay any judgments, fees, or fines that might result from something the seller did not disclose, even by mistake
• A non-competition agreement from the seller

The company reputation and your values

What is the business’s reputation and how was it earned? Are the business practices in line with your personal values? You may have an astute business sense and be able to see what needs to be done to redirect a failing business, but are your intentions feasible?

The business attorneys at San Luis Obispo’s Toews Law Group, Inc. can help you sort through all of the complexities of buying a business and provide solid legal counsel help in all aspects of startups and business ventures. We can help you:

• Obtain financing
• Make sure the business is structured for the maximum tax benefits
• Choose the best business insurance
• Make all of the legal filings required by local, state and federal regulations
• Review existing agreements and contracts including business purchase agreements, partnership agreements, employment agreements, and vendor, purchase and contractor contracts and compose new ones when necessary

Call today to get your new business started off on the right track.