If you aspire to be an entrepreneur but do not wish to start with new ideas, you could be the perfect candidate to buy an already existing business. Although buying a business upfront involves higher upfront costs, it also comes with a lower risk.
With an existing business, you have access to the actual receivables and inventory, meaning you do not have to worry about rough estimates. Buying an existing business means you will be paying for the current customer base, the brand, and the initial business concept.
Culture dictates that a founder can only sell their business when it is about to go under. Some also believe that a company can only be sold when it is not in good shape financially or when something is not right about it.
However, a founder can choose to sell for many reasons. For instance, they may have advanced in their life, and their lifestyle no longer matches their business. They could also be bored with the year to year model of the company, or a different idea is in the pipeline.
Before buying a business, one of the things an entrepreneur considers is how the company matches their lifestyle. A business that is already established presents many benefits.
For instance, a good reputation can boost the chances of successful operations in the future and make it easy to gain profits. However, several considerations must be factored in before buying. These include:
You are buying assets and not the business. If you are approaching an LLC or a corporation, do not buy the stock. Instead, purchase the assets and get a different company to come in as the purchaser. One of the reasons is so you can be treated better in tax.
Remember, your asset tax basis will be the amount paid when buying and not what the previous owner paid for them at first. Secondly, if the previous owner is facing law charges or owes money to customers, you will not be liable.
Buying business assets means you avoid the seller’s debt, liabilities, and obligations. Sales taxes are different. If in the past, the sales taxes were underreported and the tax authority of the state finds this out, they may hold you liable for everything owed by the previous business owner.
You may choose to sue the previous owner, but by this time, they may have already fled and cannot be tracked. Until you are sure that the owner has filled all necessary local and state sales tax returns, do not purchase the business. Your lawyer should help you get the clearance certificate showing that the state tax authority will not come looking for you for sales taxes previously owed.
The state tax authority will still track you down over payroll taxes. If there are already employees, find out if payroll services were being used.
Confirm that the business is current in employment tax payments. Although this process may take time to complete, it is worth the while and could save you tons of problems down the line.
Who are the employees of the business you are about to purchase? Find out about their working relationship. Look into the contracts they have signed. This approach can guide you on whether to retain them or hire new stuff.
Also, talk directly to the stuff. The question is, who do you approach? You cannot rely entirely on the owner who has personal interests and would do anything to have you buy the business.
Employees have in-depth information about the business and can, therefore, give an accurate idea of the internal operations. They can help you understand the clientele and give you an idea of how to improve daily processes.
Before purchasing a business, be sure it is legally compliant with the federal and state business laws. From the financial records to the business operations and legal documents, do as much research as you can to ensure that the business you are about to purchase is fully compliant.
These documents can help you to manage risks. You want to be sure of the business you are purchasing and the obligations you will be facing. With the help of an attorney, review the permits and the licenses, the leases and the contracts, the status of the equipment, assets, agreements, liabilities, and the inventory.
After valuing the business, you are interested in and conducting due diligence, decide whether you should make an offer to purchase it. Before reaching an agreement, try to negotiate for a better price. Once an agreement is reached, you will need to get a contract that gives legal force to it. This contract is a sign showing that you understand what you agree to and also defines the method of payment.