May 7, 2010

Ten Things To Look Out For When Buying A Business [Part 1 of 2] Cliff Ennico www.creators.com #147;I#146;ve been working on and off with a local building contractor for 17 years. Last week he told me he#146;s thinking about selling his business, and asked if I would be interested in making an offer. I did, and he accepted. Now, what do I do?#148; Well, first off, you should get a good business lawyer and accountant to help you with the paperwork, because even with a small business like this, there#146;s going to be a ton of it. Frankly, it sounds like you should have asked lots of questions before you made your offer, but it#146;s not too late since your deal with the seller is only a #147;handshake#148; at this point. Here are some things you should insist on before you close on the deal. Buy the Assets, Not the Business. If the seller is a corporation or limited liability company (LLC), under no circumstances should you buy stock in his business. Instead, offer to buy the assets of the business, and form a separate company to act as the purchaser. Why? Two reasons. First, you get better tax treatment, since your #147;tax basis#148; in the assets will be the amount you paid for them, rather than the amount your seller paid for them long, long ago. Second, if he owes money to people, or is being sued by someone, you will not assume any of those liabilities if you buy the assets. Ask About Sales Taxes and Payroll Taxes. In many states, even if you buy a business#146; assets, the state tax authority can come after you if they find out the seller owed sales, use, payroll and other business taxes. If the seller has employees (other than himself), ask if he was using a payroll service, and make sure he is current in his employment tax payments. Then, ask the state tax authority to issue a #147;clearance letter#148; saying the seller is current in his sales and use taxes on the closing date. This may take a while, but will save you tons of heartache down the road. Who Deals with the Accounts Receivable? Chances are, some of the customer will owe the seller money on the closing date. Who will be responsible for collecting these overdue debts? There are only two ways to handle this: either you purchase the accounts receivable at closing (for a discount, to reflect the fact that some of these folks won#146;t pay up), or you let the seller collect them at his leisure. My vote is for you to buy the accounts receivable at closing #150; that way if the delinquent customer wants additional work done after the closing, you#146;re in a stronger bargaining position. Can You Assume the Seller#146;s Lease? Is the seller leasing the premises where he conducts his business? If so, you should find out (1) how much time remains on the lease term, and (2) whether the landlord is willing to let you assume the seller#146;s lease #147;as is#148;, without an increase in rent. If the lease has only two years or less to run, you might want to spend the money now to negotiate a brand new lease with a five to 10 year term. Also, find out if the landlord is holding a security deposit (usually two month#146;s rent, but sometimes more) #150; your seller probably will want you to purchase his Security Deposit on top of the agreed-upon purchase price for the business assets. If the seller is including the Security Deposit in the purchase price, make sure that is spelled out in writing somewhere. Are There Prepaid Expenses? Take Yellow Page advertising, for example. When you buy a Yellow Pages ad, you normally pay for a whole year in advance. Chances are your closing will take place sometime during the year, and the seller will want to be reimbursed for the portion of the year when you are running the business and benefiting from the Yellow Pages ad. Prepaid expenses (like the seller#146;s Security Deposit) are usually not included in the agreed-upon purchase price, but are tacked on at the closing. Ask the seller now for a list of #147;closing adjustments#148; #150; amounts the seller has prepaid that will have to be #147;pro rated#148; #150; so you can budget for them accordingly and there will be no nasty surprises at the closing. More next week . . . Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. His latest book is #145;Small Business Survival Guide#146; (Adams Media, $12.95). This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2005 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com.

Posted by Staff at 1:48 AM