Company Acquisition / Buy an Existing Business
Company Acquisition / a great way to expand your brand’s territory.
To many entrepreneurs, acquiring an existing business represents less of a risk than starting a new business from scratch. While the opportunity may be less risky in some aspects, you must perform due diligence to ensure that you are fully aware of the terms of the purchase.
If you have decided to acquire an existing business, you will want to be sure you are making the right choice in your new venture. Only you can determine the right business for your needs; however, the following topics can help guide you make the best decision.
The Steps to Starting.
There are many different types of businesses to acquire. Take these steps to narrow down the list of potential businesses you may want to purchase.
- Define Your Mission! Clarify what businesses you do and do not want to engage in.
- Realistically Assess Your Talents Over & under estimating what you can handle can make or break a new business venture.
- List Your Conditions for Purchase Consider if a business has a condition that is unfavorable to you, such as location and time commitment.
- Quantify Your Investment Finding exactly what you want at the price you want be difficult. Find out exactly WHY they are selling – some reasons can be deal killers.
Advantages to Choosing an Existing Business.
The most obvious advantage to buying an existing business is less risk and startup costs. Even better, existing inventory and receivables can give you immediate cash flow..
Disadvantages to buying an Existing Business / Company Acquisition
There are also some downsides to acquiring an existing business. Purchasing cost may be much higher than the cost of starting a new business because of the initial business concept, customer base, brand and other fundamental work that has already been done. Carefully research the prospective business for any hidden problems, liabilities, debts, etc.
Doing Due Diligence
As you become a business owner, there are items that need to be addressed before entering into any business agreements or transactions.
- Get any Licenses / Permits, etc Needed Businesses need local licenses / permits to operate. The type of license or permit you need will vary from state to state. Use SBA’s licenses and permits finder tool to get a listing of federal, state and local permits and licenses you will need to run your business.
- Zoning Requirements: may affect the your prospective business in a particular area. Research Basic Zoning Laws for your area.
- Environmental Concerns: If real property is acquired with the sale, check environmental regulations in the area.See EPA’s Small Business Gateway for more information.
Determining the Value of a Business
There are a number of different methods to determine a fair and equitable price for the sale of the business. Here are a few:
- ” Capitalized Earnings Approach“: Profit on investment expected by an investor.
- Excess Earning Method: The excess earning method separates profit from assets from other earnings.
- Cash Flow Method: used to determine how much of a loan the business can support. The adjusted cash flow is used as a benchmark to measure the firm’s ability to service debt.
- Tangible Assets (Balance Sheet) Method: This method values the business by the tangible assets.
- “Value of Specific Intangible Assets Method”: Compares buying a business vs. startup
For more information, read SCORE’s article on How to Value Your Business
Doing Research for Purchasing a Business
Once you’ve found a business that you interested in, investigate all details of the business.
Here’s some factors to consider in any company acquisition.
Letter of Intent: should detail the proposed price and the terms and conditions for a company acquisition.
Confidentiality (non disclosure) Agreement: This covenant indicates that you t will not make public, or “disclose”, any details of the proposed sale.
Contracts and Leases: If the business has a current lease for the location, be aware that you may have to work with the landlord to assume any existing lease on the business premises or negotiate a new lease.
Financial Statements: Review financial records for the preceding three to five years. Get an audit letter from a reputable CPA firm. A simple financial review, produced by the business owner, is not sufficient.
Tax Returns: Review the business’s tax returns from the past three to five years. You will see tax liabilities and possible earnings potential.
Crucial Documents: Numerous documents should be checked during your investigation: Property documents, customer lists, sales records, advertising materials, employee and manager information & any contracts.
Legal Council: You should hire an experienced business/corporate attorney, to review the legal / organizational documents of the business you are considering. Also, an accountant can give you an expert evaluation of the prospect’s financial state.
Sales Agreement for acquiring a Business
A “sales agreement” is the main component of a business purchase. The sales agreement specifies all assets acquired in the sale, both “real” & intangible – including customer lists, “intellectual property” and accrued customer goodwill. It’s wise to have a lawyer outline the terms of the sale. If not, at least have an attorney review the agreement before signing.
Checklist for Closing On a Business
The closing is the final step in the process of acquiring a business. It is more than just “advisable” to have an experienced business/corporate lawyer go over all the paperwork necessary at closing.
The following items should be addressed in a closing:
- Adjusted Purchase Price This will include prorated items such as rent, utilities, and inventory up to the time of closing.
- A Review of Required Documents should include a ” corporate resolution” approving the sale, proof the corporation is in good standing, or any tax release forms that may have been promised by the seller. Consult your local “Department of Corporations” or Secretary of State for further details.
- Signing Promissory Note In some cases, you may be offered seller backed financing – have a business/corporate attorney review all documents
- Security Agreements A security agreement lists the assets that will be used for security as a promise for payment of the loan.
- UCC Financing Statement “Uniform Commercial Code” documents are filed with the Secretary of State in the state you intend to do business in.
- Lease: If you taking over an existing lease, make sure that you have the landlord’s concurrence.If you are negotiating a new lease, make sure you are both in agreement of the terms.
- Vehicles: If the purchase of the business includes vehicles, you may have to complete transfer documents for the vehicles. Consult your local Motor Vehicle Department for regulations, permits, etc, on business vehicles.
- Bill of Sale: The bill of sale documents the transfer of business ownership. It also details the ownership of “tangible business assets” not detailed in the agreement.
- “Patents, Trademarks and Copyrights”:Be sure all necessary copyrights and trademarks are transferred to you without a hitch, Failure to do so could be a very costly oversight.
- Franchise: You may need to complete franchise documents if the business is a franchise. See the Consumer Guide to acquiring a Franchise for more information.
- Closing or “Settlement Sheet” The closing or settlement sheet lists all financial aspects of a business sale. “Everything listed on the settlement should have been negotiated prior to the closing”.
- Non-Compete Agreement: Very advisable to forge and file an agreement to not compete within a specified area & timeframe. Take this seriously – post sale competition happens all the time.
- Consultation/Employment Agreement: If the seller is agreeing to remain on for a specified amount of time, this documentation is necessary for legal purposes.
- Complete “ IRS Form 8594 Asset Acquisition Statement” It will describe how the sale was allocated and the amount of assets received.
- “Bulk Sale Laws”: Make sure that you comply with bulk sale laws, which govern the sale of business inventory.