Purchasing a Business

Have you ever pondered leaving your present employer and purchasing a business? Have you ever thought about expanding your existing business through the acquisition of another company? If so, read on.

There are numerous companies that act as business brokers in the Tampa Bay and Florida areas. These companies provide the contact information necessary to determine the types and availability of businesses for sale in your area. These businesses range in size as well as type. The business broker however, does not provide advice in reference to the viability of the business. For such advice, the purchaser of a business might consider contacting either a business valuator or a business consultant of some kind. In addition, in obtaining financing, a business consultant can be a valuable tool in assisting and drafting a plan for your business after review of the financial statements. Of course all of these consultants as well as your business law attorney will charge for their services. Such charges may seem expensive at the outset, however, the assurance of having professionals review the acquisition at the outset will save much heartache in the future.

When purchasing any business, the acquiring entity must make a number of determinations. First, will the purchaser purchase the stock of the existing business or the assets. This is a determination based primarily upon the existing liabilities of the present company. Most of the time, purchasing the assets is recommended. When stock is purchased, liabilities go with the purchase. When assets are purchased, as long as secured creditors are paid at the closing, the unsecured debt of the existing corporation does not go with the assets as long as market value is paid for the assets. It is up to the seller to ensure that unsecured debt is paid at the closing.

Next, the purchaser needs to determine the type and value of the assets. This determination requires a review of financial statements and inventory lists of the existing corporation. This review should be part of the contractual agreement that is reached prior to the purchase of the business. Such a review will include but not be limited to a total review of the inventory, balance sheets, accounts receivable listing, income statements as well as all other financial documents including tax returns. The tax returns for a corporation are often valuable tools to determine the accuracy of the internal financial statements. Tax returns are often prepared by an independent auditor, which are easily compared to the internal books of the company. Of course, this presumes that the tax returns are prepared by an independent accountant separate and distinct from the corporation. If a principal of the corporation prepares the returns, they should be reviewed very closely for their accuracy and compared to the actual financial statements of the company. A review of the corporate checkbooks might also be recommended to compare the checkbooks with the balance sheets and the payable ledger for the corporation. In any event, a thorough review of the financial background of the corporation should occur prior to closing. If any discrepancy exists, it needs to be addressed clearly with the seller prior to purchasing the business.

In addition to this financial review, an interview with employees might also be recommended. If any of the employees are going to continue to work with the corporation after closing, they need to be interviewed and reviewed very closely prior to closing. Their salaries need to be reviewed as well.

In addition, the income and profit loss statements for the corporation should be reviewed for at least the last three years. These statements will clearly show how the company has done. The balance sheet and income statement should be reviewed for payments to the principals. If the principals received no salary from the corporation for the last three years, then a small profit at the end of the year may not accurately reflect how the business is actually doing. There are other ways that a business can show profitability when in actuality a profit does not exist. Each and every line item in the balance sheet and income statement should be reviewed very closely for a determination of whether or not all amounts are reflected on the statements. If a principal of the corporation has substantial outstanding notes due, this could also be a red flag. Such notes could show the existence of ongoing debt of the corporation.

After a thorough review of the financial’s and the profit of the corporation, the closing can take place. At the closing, the seller should sign warranties that warrant the accuracy of the documents signed at the closing and reviewed prior to the closing. Specific documents such as the tax returns could be attached to affidavits which would guarantee the accuracy of the statements. One way that a buyer can protect itself in a purchase is to have the seller finance part of the transaction. If the buyer is paying back the seller from the closing, if the business fails, the seller fails as well. Such an insurance policy does give the buyer some reassurance that the seller is being truthful.

Financing of the acquisition is also a paramount of importance at the closing. The buyer must ensure that the financing arranged at the closing will allow the buyer to operate in the black. If the financing terms are too onerous, the principals of the corporation may not be able to take a salary. This is not the purpose of starting a corporation. The purpose is to make a profit not to operate in the red. Keeping expenses low and income high is the goal.

Finally, the buyer should carefully review the closing documentation. The closing statement will show how the money is coming in and going out at the closing. Fees which are being paid from the closing should be reviewed by counsel prior to closing. In addition, all of the affidavits and closing documents should be reviewed by counsel prior to closing. Once further point, do not assume that the attorney conducting the closing represents your interests. Oftentimes, a business broker uses an independent attorney to prepare the documents who specifically does not represent either the buyer or the seller. In such a case, as the buyer or the seller, you need your own attorney representing your interest at the closing.

Please be aware, this list is by no means exhaustive. Each and every type of business has its own issues to resolve prior to purchase. Should you wish to further discuss any matter raised by this article, please do not hesitate to contact our firm.

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