You were scanning Craigslist or talking to a business broker and found a business you want to buy. It might be a strip mall, a salon or even a franchise opportunity.
I’m sharing five tips as you navigate this very detailed process and, of course, the first step is to call an attorney. At Sugarman Law, we work with many business owners both on the selling and buying sides.
There are two types of business purchases – an asset purchase (where you buy all the assets of the business but not the actual corporation) and a stock purchase (where you actually buy the corporation/company from the prior shareholder/member). There are pros and cons for each type of purchase, but generally, I recommend an asset purchase. If you are looking to buy a business, give me a call before so we can determine the right course you are going to take.
We can get the purchase done fairly quickly when the right steps are taken, but remember that first a Bulk Sales Transfer Notice must be filed in the state and that takes 2-3 weeks.
Some things to remember
- Put a due diligence clause in your contract. Sometimes the due diligence period is done with a confidentiality agreement and letter of intent and sometimes it is built into the contract, where you have a certain period of time (generally, 2 weeks – 30 days) to accomplish your due diligence and you can cancel if you don’t like what you see. If you are about to buy a business, this gives you the time, with confidentiality, to review the books and check out the business. You need to ensure you are going to make the kind of money you expect and the money you’ve been told you will make by looking at the true numbers. If you don’t like what you see, you can get out of the contract. It is very important that your accountant is part of this process. Make sure the seller has paid sales tax and filed quarterly tax returns. If they haven’t, make sure there is money in escrow or it could end up becoming your responsibility to pay.
- Talk to the current owner. They will be a big part of the transition of you coming into the business. Ask them questions like how many employees they have; if those employees are owed any vacation time; if there are employment contracts in place; if there is a union; if everyone has been paid up to date. These are vital in making sure you aren’t walking into anything that will end up costing you money and time.
- Understand your financing options. If you are taking out an SBA loan, know that that process is much longer than conventional financing. Get your documents in place and make sure your contract says the sale is subject to financing.
- Know that buying a franchise is different. The franchise company has to approve you as a purchaser and approve the agreement.
- Review lease and payments. The purchase of a business usually includes a lease. You’ll need to talk to the landlord and also get an Assignment of Lease. If the former owner has been there for quite some time, the rent has most likely gone up. The security deposit paid by the original owner will need to be credited to them at the time of sale and you will be responsible for paying the new security deposit fee based on the current lease rate.
This process can be very exciting, but also stressful. Your own corporate books have to be in order for the lender and as with any major purchase in life, doing your research and having support by your side is the best plan.