Take a Practical Approach to Key Issues
Buying a business has many advantages, including an established
clientele and cash flow. But, buying a business can also
be fraught with risks. So, it’s important to take
a practical approach to the key issues.
What’s the business worth?
Sellers frequently have an inflated idea
about what their business is worth. So, don’t assume the asking price is reasonable. There are "rules
of thumb" for business valuations. Tom West’s "Business Reference Guide" is
an excellent source of information about the valuation of different types
of businesses (for more information go to www.businessbrokeragepress.com).
Why is the business for sale?
Understanding why the business is for sale gives you insight
into the market and the business potential. Reasons for sale vary greatly.
The implications are quite different if the seller has health problems or
if the seller wants out because of declining business conditions.
Working with
a business broker.
A knowledgeable and professional business broker can be
an effective intermediary and assist in negotiating the deal. The business
broker usually represents the seller.
Making an offer - with contingencies.
Once you’re decided
on a price and you’re ready to
make an offer, you need to be sure to make the offer contingent
upon certain issues such as:
- verification of books and records;
- transferability
of licenses, if any;
- an acceptable lease;
- training and transition
period;
- non-compete by seller;
- obtaining financing;
- no liens or encumbrances;
- retention of
key employees; and
- verification of inventory.
Usually the initial offer is not accepted and
the seller makes a "counter
offer." Buyer and seller need to talk candidly
about what’s
important to each to make the transaction work.
Negotiating
the deal - use a "term sheet."
Using a one page "term
sheet" or simply answering the questions:
Who? What? Where? and How much? helps to focus the negotiations
on what’s important
to the parties. Lawyers, accountants and other
advisers can then review the term sheet and discuss the
issues. Be wary of professional advisers who use lots
of boilerplate, take extreme positions or use tactics that
are adversarial. Strive always to keep the negotiations "win-win."
Asset v. Stock Sale? Most deals
are structured as asset sales so that the buyer is protected from any undisclosed
liabilities of the seller. For the buyer, the asset purchase is advantageous
from a tax point of view because the buyer gets a "stepped up basis" (basis
is the cost for tax purposes and gives the buyer a more rapid write off of
depreciable assets). For the seller, a stock sale is more desirable from
a tax point of view. Allocation
of Purchase Price In
negotiating the terms, buyer and seller need to be flexible and
get professional tax advice. It’s important
to agree on how to allocate the purchase price between tangible (equipment)
and intangible (goodwill) assets since the allocation impacts how the items
are handled for tax purposes. The allocation of the purchase price, and the
resulting tax treatment, must be mutually agreed upon and reported to the
IRS. Non-compete
by Seller It’s
customary for the seller to agree not to operate or be involved
in a competing business for a period of years in the geographic
area of the business.
Conducting "due diligence."
Once
the offer is accepted, you enter the "due diligence phase." This
is kind of like a home inspection. You wouldn’t buy a house without
checking out the systems (e.g., heating, plumbing, septic) and the
liabilities (title search). The same kind of systems and liability
analysis (e.g., accounting systems, computer systems, payroll tax liabilities,
liens) is important in buying a business.
Conducting due diligence usually
requires professional experience. Unless you really understand business
books and financial records, it’s
wise to get professional help.
If the due diligence process turns up some problems or a history
of poor financial performance, it’s important to think through
how you will operate the business. (e.g., what will you do differently
to improve the financial results of the practice?) This process
leads to thoughtful business planning, which is critical to the
future success of the business.
The results of due diligence can
result in canceling the deal or renegotiating the purchase price.
Closing.
The closing (official transfer of ownership) occurs
after due diligence is completed and all the contingencies have
been resolved. The final purchase and sale documents, including
the Bill of Sale and Promissory Notes, should be clear and
understandable (without gobs of boilerplate.)
Managing the
Ownership Transition - Communication and Cooperation!
A smooth transition
is critical to retaining customers. Sellers usually provide some training
or assistance in transitioning the business to the new owner. A plan should
be detailed for how the ownership transfer will be communicated
to employees, customers, suppliers and the public. A
joint announcement, press release or other means of communications
should be agreed upon. Mutual cooperation is essential
to a smooth transition of ownership.
Jean D. Sifleet
Attorney & CPA
120 South Meadow Road
Clinton, MA 01510
t. 978-368-6104
f. 978-368-6105
jean@smartfast.com
www.smartfast.com
P.S. An alternative to "buying" a business is "starting" a business.
We’ll
discuss advantages and disadvantages of starting a business in a future
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