The decision to start a business is both exciting and challenging for those with an entrepreneurial spirit. This blog has already featured many articles about the different types of businesses; from LLC’s to corporations and sole-proprietorships, as well as some of the positive and negative aspects associated with each. The blog has also featured articles about the steps needed to start a business from the ground up. This article will focus on what to do if you want to buy a business that is already in existence.
It’s no surprise that starting a business is challenging and risky, however if your business is successful the upside potential is major. For those less willing to take on the risk, another option might be to purchase a business that has already proven to be successful. The tradeoff for this added security of course, is that purchasing an existing business comes with a higher price tag. This is a major investment and a smart purchaser will protect their investment by ensuring the transaction is completed via a thorough sales agreement.
Buying a business can be a complex transaction. There are multiple issues that a purchaser needs to be aware of. This is true for any purchaser, but especially important to a first time purchase who may not have experience in the nature of purchasing a business, or is purchasing a business in a new field. For any particular business there are important focus areas strongly tied to future success that should be addressed. Some of these can include the purchase of good will, the formation of a new entity and simply purchasing assets, the future liabilities, and the overall purchase price to name a few. Each business will have different answers depending on the specifics of the business you are looking to acquire. However, the answers are important, not just from a purchase standpoint but also future considerations such as tax consequences and profitability.
Even if the correct questions are asked, it is still important for a purchaser to conduct adequate pre-closing due diligence. All aspects of the business must be investigated including how the business is run. Adequate due diligence is one of the best methods for a purchaser to protect themselves from issues that are not easily recognizable. For instance a purchaser should verify the entities involved in the transaction exist and are in good standing with the Arizona Corporation Commission. Verify that the legal name and the name the company is doing business under both exist and are in good standing.
Verify the seller has the authority to sign on behalf of the business. Verify there are no liens or judgments against the business. Obtain copies of relevant contracts, make a physical inspection of the operations, obtain copies of the relevant leases. The list is much more exhaustive but proves the point a lot of work goes into purchasing an established business. Thus, it is important, especially for a first time purchaser, to consult with licensed professionals, including an attorney, about the aspects of purchasing a business listed above as well as many other aspects.
Having an experienced attorney assist in the purchase of a business can be crucial. It is important to ask the correct questions when purchasing a business, negotiating an appropriate price and drafting a thorough sales agreement. Additionally, a purchaser will also likely want a covenant to not compete drafted as part of the sales agreement as well. If you are interested in forming a corporation, or a different business entity, schedule a free consultation with one of our experienced lawyers to find out which entity may be right for you.