Buy The Assets
Never should you purchase stock in a seller’s corporation or LLC. Instead of doing that, offer to purchase assets of the business and then from there create a separate company and act as the purchaser. You will get better tax treatment. If you act as a purchaser, your tax basis will be what you paid for them instead of what your seller paid for them. This is also a great option because if your seller owes money to lenders or is being sued by somebody, you will not take over those liabilities if you purchase the business assets.
Understand Sales Tax And Payroll Tax
You need to know if your seller owed sales, use, payroll or other business taxes because even if you only purchased the business, their debtors have permission to come after you for their money. Make sure your seller is updated and current in his employment tax payments if he or she has employees other than him or herself. Typically if he or she uses a payroll service, your seller keeps his or her tax payments current. Ask the state tax authority to provide you with a clearance letter that expresses with words that your seller is up-to-date in his sales and use taxes on the closing date.
Make A Plan For Accounts Receivable
When buying a business, that business may also come with customers who owe the seller money. Deciding who will handle the accounts receivable is another important step to consider when you are purchasing a company from a seller. You can either purchase the accounts receivable at closing at a discounted price that mirrors the fact some people owe money, or you can let your seller collect them at his or her convenience. The recommended route is to purchase the accounts receivable at closing because if that late-paying customer wants more work done after the closing, you can bargain your position in providing that service or product at a cost that suits you.
Determine How You Can Get Ahold Of The Lease
Sometimes when you purchase a business, the lease to the building they conduct business out of also comes with them. There are a couple of things you should do. The first thing is to find out how much time they have left on the lease term. The second thing to do is to find out whether or not the landlord or property manager is okay to let you take over the seller’s lease as is, with no rent increase.
If there are less than two years left on the lease, it may be better to pay for the lease now and negotiate a new five- or 10-year lease term. Find out if the seller’s landlord is holding their security deposit and determine if you would like to purchase the security deposit from the seller in addition to the already agreed-upon purchase price for the business asset.
Determine If There Are Any Prepaid Expenses
There are some things that you may be walking into that have already been paid for and are currently in use. Whatever it is that is already prepaid, whether that is an advertisement or something similar that can be hard to ask for a refund, your seller will more than likely want to be reimbursed. Typically, prepaid expenses are not included in the purchase price of that asset, but are commonly added at the closing. This is why it is important to ask your seller for a list of closing adjustments. These are dollar amounts they have prepaid that will now have to be pro-rated. Doing this ensures that there are no closing cost surprises.
Get Things In Writing
You want to make sure that you negotiate a letter of intent, also known as a term sheet. This is a two- to three-page agreement between the buyer and seller of a business that lays out exactly all the crucial terms and conditions of the sale. It should include things like the purchase price, how it will be paid, when it will be paid, assets that are to be sold to the buyer, assets that will be kept by the seller and the terms of the sellers’s non-compete agreement.
Remember that thee are not binding. That does not mean that you should skip this step. This is a good thing to do because it will give you and your seller the opportunity to hash out any discrepancies about what is about to happen when buying their business asset. Most LOIs help out lawyers get the sale documents right on the first or second draft since most of the terms and conditions have already been laid out in the LOI. This saves you money on legal fees.
Be Wary Of Bulk Sales Laws
Depending on which state you live in, you are required to notify your seller’s creditors that you are purchasing their business assets. If you do not do this, you risk of giving the seller’s creditors an opportunity at rescinding the transaction as a way to prevent the seller’s assets from being sold out from under them. That is why it is always a good idea to get a list of the seller’s creditors and send them “notices of sale” even if your seller has no creditors. Sometimes your state tax authority needs to have a copy of the “bulk sales notice” so it can better decide if the seller owes any sales or use taxes. Do not worry if your seller owes those things. They will have to settle up with the state before closing.
Attain An Indemnity From The Seller
This promises that the seller will defend the lawsuit if they get sued because of something they did or failed to do and will pay all judgments and fees if anything should happen. Just like you are requesting an indemnity from the seller, you should also be prepared to give one just in case he or she gets sued because of something you did or failed to do after the closing. Things get overlooked. It is better to be safe than sorry.
Do Not Be So Quick To Shoo Away The Seller
It is ok for the seller to stick around after the closing. In fact, it may be for the best. Remember that though this is a business, there are personal relationships involved. Take for instance the customers. The customers have a personal relationship with the owner, typically. You want your seller to continue to show up at the business for a few after the closing to introduce you to customers and get you familiar with everything. Doing so provides a smoother transition.