Preferred Consumer | Small Business | Starting A Small Business | Buying an Existing Business | Purchasing an Existing Business

Purchasing an Existing Business

Once you have determined that you want to purchase a business, you must decide on the purchase price. This will depend on a number of factors, including whether you are going to purchase the balance sheet (includes both assets and liabilities) or just the assets.

Business Structure

Once you find a business that you may be interested in, determine what type of legal entity owns the business: Sole Proprietor, Partnership or Corporation. This will affect your purchasing strategy.

  • Fair Market Value -- Most people believe that a business should be sold for fair market value. A valuation requires a thorough analysis of several years of the business operation and an opinion about the future outlook of the industry, the economy and how the subject company will compete. Read more about determining market value.
  • Goodwill -- Goodwill is defined as the characteristics of a business or individual that cause customers to return to that business or person. Goodwill is considered in almost every type of business valuation and clearly contributes to the tangible value of a business.
  • Sales Agreement -- The sales agreement is the key document in buying the business assets or the stock of a corporation. It is important to have an attorney make sure the agreement is accurate and contains all of the terms of the purchase. Read a checklist of items that should be addressed in the agreement.
  • Financing -- It may be important at this time to consider the financing of the purchase. If you have the proceeds in place, then you can proceed to pre-closing activities. If you need to obtain financing, look at options available for loans.

Pre-Closing

  • Licenses and Permits -- Most businesses need licenses and permits to operate. The type of license or permit you need depends on your industry and the state in which you are located. License and permit requirements also affect where you locate your business, how much you’ll have to spend for remodeling and whether or not you’ll have to provide off-street parking.
  • Zoning -- It is important to check the zoning requirements for the area where you are acquiring your business. The zoning requirements may affect the type of business that you are intending to operate in a particular area.
  • Environmental -- If you are acquiring real property along with the acquisition of the business, it is important to check the environmental regulations in the area.
  • Sales Checklist -- The sales agreement is the key document in buying the business assets or the stock of a corporation. It is important to make sure the agreement is accurate and contains all of the terms of the purchase. It would be a good idea to have an attorney review this document. It is in this agreement that you should define everything that you intent to purchase of the business, assets, customer lists, intellectual property and goodwill.

The following is a checklist of items that should be addressed in the agreement:

  • Names of Seller, Buyer & Business
  • Background information
  • Assets being sold
  • Purchase price and Allocation of Assets
  • Covenant Not to Compete
  • Any adjustments to be made
  • The Terms of the Agreement and payment terms
  • List of inventory included in the sale
  • Compliance with the Bulk Sales laws of the state
  • Any representation and warranties of the seller
  • Any representation and warranties of the buyer
  • Determination as to the access to any business information
  • Determination as to the running of the business prior to closing
  • Contingencies
  • Possibilities of having the seller continue as a consultant
  • Fees - including brokers fees
  • Date of closing

Closing Checklist

It is important during the closing to make sure that you have legal counsel available to review all of the documentation necessary for the transfer of the business.

The following items should be addressed in a closing:

  • Adjust purchase price -- This would take care of prorated items such as rent, utilities and inventory up to the time of closing.
  • Review documents required to be provided by the seller -- This would a corporate resolution approving the sale, evidence that a corporation is in good standing, 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 are 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 are going to finance your business.
  • Lease -- If you have agreed to assume an existing lease, you will be required to execute the assumption. Make sure that you have the landlords concurrence to assumption of the lease. You may instead 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, trademarks 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 is 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 seller has agreed to remain on for a prior of time this documentation would be necessary.
  • Complete IRS Form 8594, Asset Acquisition Statement -- This document will indicate how the purchase was allocated amount the various assets. Important for your tax return.
  • Bulk Sale Laws -- Make sure that all bulk sale laws have been complied with in the transfer of the business assets.