What to Do Before Buying Out a Business

Written by Finance Video. Posted in Business comps, Business valuation and analysis, Valuation market approach

Business valuation report

If you are looking into buying a business for the first time or are looking to make an offer on one then there are several things that you need to do and be aware of before you close the deal. If you’ve already made an offer on a business without even using company valuation tools necessary, then you’ll probably need to back pedal a little bit and make sure that all the following things are in order.

Buy the Assets, not the Business
What does this mean? Basically, don’t just buy stock in a business. If a seller is an LLC or a corporation, that is something that they will probably offer. Don’t fall for it. Instead, buy the assets of the business so that you can make your own company. The main reason for this is so if the seller owes anyone money or is being sued for something, you won’t be responsible for any of these risks and liabilities. You will also get better tax treatment seeing as you’ll be liable for the amount that you paid, not the amount that your seller paid for them however long ago.

Find out about Taxes
This is the sales taxes and payroll taxes. Depending on the state, if you buy assets the IRS can still come after you if the seller owed taxes on sales or payroll. Use your company valuation tools to find out if the seller was using a payroll service. Make sure that he is current with all tax issues. You may even want to go as far as requesting a state letter stating that the seller is current in all taxes. While it might take a while to do now, it’ll be worth it later on if something happens.

Decide Who Deals with Accounts Receivable
More often than not, businesses always have someone that owes them money. So, if they are selling their business, this means that the customers will need to pay their accounts in full by the closing date. You’ll need to agree with the seller about who is going to be responsible for collecting those debts. You can either buy the accounts at closing, which you should do at a discount in case some of the people end up defaulting and not paying at all. Or you can leave it to the seller to collect. It’s recommended to purchases the accounts receivable so that you can keep the customer and the future business. Again, factor this into the company valuation tools to make sure that it’s worth it.

Ask about the Lease
If within the business valuation analysis, you have determined that the actual location is going to be beneficial to you, find out if you can assume the seller’s lease. Find out how much time remains on the lease and if the landlord is willing to let you take it over as is. Also find out about any security deposits and have everything spelled out in writing before moving forward.

What are any Prepaid Expenses
Often times when you purchase something, you will pay in advance. If you are making your purchases in the middle of the year, then the seller might want to be reimbursed for the portion of the year that you are the owner. Make sure you put this information and these numbers in to your small business valuation tools when trying to put a value on the company. The seller should have a list of closing adjustments which are the amounts that the seller prepaid. These will have to be pro rated and you will have to budget properly to include them. You don’t want there to be any surprises when it comes to closing time.

Write a Letter of Intent
This doesn’t have to be a very long statement. It is basically a few pages that states the agreement between the buyer and the seller. It spells out everything that you have negotiated and agreed on and puts it all in writing. Each of you should keep a copy of the agreement in case something turns up later on. You should include the numbers that the company valuation tools came up with. A letter of intent is not binding but it will remind both parties of conversations and agreements.

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