Q: I'd like to own my own business, and I've heard buying an existing business rather than starting one from scratch might be a good way to increase my chances of success. What do I need to know about buying a business?
A: You're certainly correct-buying a successful existing business can sometimes be better than starting your own since someone else has already tested the market and developed a customer base. Bear in mind, of course, the purchase price will probably reflect this fact. Here are a few things to keep in mind when purchasing an existing business:
Gather information about the business first. Once you've identified a business you're interested in, you'll want to gather sufficient information to determine whether to go forward with the deal and to decide on a reasonable price for the business. Specifically, you'll want to look at financials and tax returns for the business and the owner's personal tax returns as well. If you're unaccustomed to examining such documents, it would be wise to have your CPA examine these documents as well.
Sign a confidentiality agreement. In many cases, sellers won't want to release such confidential information unless the potential buyer agrees to sign a confidentiality agreement. As long as the agreement in no way binds you to purchase the business, it's OK to sign and it may be the only way to obtain the information you need. As in the case of all legal documents you sign, having an attorney review the document before you sign is smart.
Evaluate the business for sale. Unless you're experienced at valuing businesses, it's well-worth the fee to have a professional assist you in deciding on a reasonable purchase price for the business you're considering. You may be able to obtain help from your local Small Business Development Center or try a local CPA firm or a member of the American Society of Appraisers for someone who specializes in business valuation.
Depending on the kind of business for sale and the way in which you're purchasing the business, the areas you'll want to examine will include some or all of the following:
Fixed assets such as furniture, fixtures, equipment
Intangible assets such as a lease contract, trade name, customer lists, goodwill
Intellectual property such as patents, trademarks or trade secrets
Employment agreements if the employees in question will be staying
Contracts with major suppliers and major customers
Litigation current or threatened
Workers' compensation and unemployment claims
Warranties or guarantees offered by the business
Tax payments and tax liabilities
Environmental considerations such as toxic waste disposal or air or ground water pollution
Franchise documents (if applicable)
Structure the purchase properly. If you're purchasing an existing business that has been operating as a corporation, you have a choice of buying the stock of the corporation or purchasing the assets only. If you buy the stock, you're purchasing not only the assets but the liabilities as well. In most instances, it will be to your advantage from both a liability and tax standpoint to purchase the assets only, but there are exceptions. When the corporation has some unique assets such as a favorable lease, tax carryovers or the like that can't be transferred, you may want to consider a stock purchase. Always obtain legal advice to determine how to structure the purchase to your best advantage.
A final word of advice: Unless the seller insists on drawing it up, you should draft the sales agreement yourself, take it to your attorney for review, and present it to the seller. You're much more likely to get terms favorable to the buyer if you do the drafting.
Carlotta Roberts has a J.D. degree from Atlanta Law School. Having worked in the areas of business organization, contracts and employer/employee relations, she's been a consultant to small-business owners since 1981. She worked as a staff attorney concentrating in employment law issues before joining the Small Business Development Center national network in 1986. Currently area director for the Kennesaw State University Small Business Development Center near Atlanta, she has developed two nationally recognized programs: The Cobb Micro Enterprise Council, which won the Vision 2000 award for small-business development in 1999, and the Franchise Institute, developed to provide assistance to franchisees.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.