ELIOT WAGONHEIM: If you are interested in buying a business, you should watch out for a company where the value walks out the door right after the sale is consummated.
FRED PROVORNY: You need to do some due diligence as a buyer.
EDWARD JACOBSON: I would like to see the seller around for a significant period of time to help with the transition, so that I am buying something that is not going to evaporate if the seller leaves.
ELIOT WAGONHEIM: If the owner of the company you just bought rides off into the sunset, is there anybody else that has the relationships that sustain the business, does anybody know how to work the business. If the salesmen are not locked down, if there is no contract with them, and so they can take the relationships out the door right after you buy the company, meaning that they can take 70% of the revenues out the door after you buy the company, that is a problem.
FRED PROVORNY: And also get some idea from outside experts as to what its prospects are?
ELIOT WAGONHEIM: There are several ways to find out, one is to work with an experienced business broker or depending upon the size of the industry, an investment banker. These people will have a feel for what a business is worth.
EDWARD JACOBSON: Not knowing what is worth is the biggest question mark that any prospective buyer has or any seller has.
ELIOT WAGONHEIM: There are many people, who are available and qualified to do business evaluations.
EDWARD JACOBSON: It is amazing how many people come to me and they say what is my business worth, they have no idea.
ELIOT WAGONHEIM: If for example, you are purchasing a business that is in a different industry, an industry with which perhaps you are not as familiar, it may be a good idea to get a business evaluation.
EDWARD JACOBSON: In simplistic terms, the business is worth what it can generate in earnings.
FRED PROVORNY: You really need to get an effect into the bowels of the company and see what makes it tick.
EDWARD JACOBSON: Some businesses will run through personal expenses, some businesses will either overpay the owner or underpay the owner.
FRED PROVORNY: In the words of the late President Regan, trust, but verify.
EDWARD JOHNSON: Inherently, there is a lot of risk associated with a small business.
FRED PROVORNY: The due diligence phase is the verification.
RICHARD BOOTH: What buyers are interested in is not getting any liabilities that they do not understand or that might crop up later and perhaps are not even known about at the time of the sale of the business.
ELIOT WAGONHEIM: Make sure that what you are buying is going to be the same company after closing as it was in the days leading up to closing.
To Buy or Not to Buy
Hmm, good question. Let's weigh the pros and cons:
"Uh, Maybe I Should Buy Fred's Company ..."
Among the many favorable aspects to buying an existing business is the drastic reduction in startup costs. In addition, cash flow may be immediate because of existing inventory and receivables. Other positive effects include existing goodwill and easier financing opportunities, assuming the business has a positive track record
"Wait, Why Pay Fred if I Could Start My Own Firm?"
Among the biggest downsides to buying a small business is the initial purchasing cost. As developing the business concept, customer base, brands, and other fundamental work has already been done, the costs of acquiring an existing business may be greater then starting a new business. Other possible disadvantages include hidden problems associated with the business and receivables that are valued at the time of purchase, but later turn out to be noncollectable
Okay, so you've decided to make Fred happy, take the plunge and buy his business. You've even signed a contract to buy it. But before you close on this monumental transaction, make sure that your business attorney available to review all of the "closing documents" necessary for the legal transfer of the business.
Among other aspects of this transaction, make sure you review carefully the following terms of the deal:
- Adjust Purchase Price - This would take care of prorated items like rent, utilities, and inventory up to the time of closing
- Review Documents Required to be Provided by the Seller - These would be a corporate resolution approving the sale, evidence that a corporation is in good standing, or any tax releases that may be been promised by the seller. Check with your local department of corporations or secretary of state
- Signing Promissory Note - In some cases, the seller will carry back financing, so have an attorney review any Note documentation
- Security Agreements - These documents may be necessary if you're going to finance your purchase. A Security Agreement lists the assets that will be used for security as a promise for payment of the loan
- UCC Financing Statements - These documents are recorded with the Secretary of State in the state you have purchased your business. Again, these documents are necessary if you're going to finance your business
- Lease - If you have agreed to assume an existing lease, you'll be required to execute the assumption. Make sure that you have the landlord's concurrence to assumption of the lease. You may have negotiated a new lease with the landlord instead of assuming the existing lease
- Vehicles - If the purchase includes vehicles, you may have to execute the transfer documents for the vehicles. You can check with your local Department of Motor Vehicles to determine the correct procedure and necessary forms
- Bill of Sale - The bill of sale will be proof of the sale of the business and will transfer the ownership of the other tangible business assets not specifically transferred on their own
- Patents,Ttrademarks, and Copyrights - May need to execute the necessary forms if part of the transaction
- Franchise - May have to execute franchise documents if the purchase of the business was a franchise
- Closing or Settlement Sheet - The closing or settlement sheet will list all financial aspects of the transaction. Everything listed on the settlement should have been negotiated prior to the closing, so there should be no surprises
- Covenant Not to Compete - it's a good idea to have the seller execute this agreement. This will help add to the success of your operation of the business without any interference from the previous owner
- Consultation/Employment Agreement - If the seller has agreed to remain on for an amount of time, this documentation would be necessary
- Complete Asset Acquisition Statement - For tax purposes, you will need to allocate various elements of the purchase to various types of assets involved in the sale using IRS Form 8594
- Bulk Sale Laws - Make sure that all bulk sale laws have been complied with in the transfer of the business assets