Doing Research for Purchasing a Business
Once you have found a business that you would like to buy, it is important to conduct a thorough, objective investigation. The following list includes relevant information you want to include when researching the business you want to buy.
Letter of Intent: The letter of intent should spell out the proposed price, the terms of the purchase and the conditions for the sale of the business.
Confidentiality Agreement: A confidentiality agreement indicates that you will not use the information about the seller's business for any purpose other than making the decision to buy it.
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: Examine the financial statements from the business for at least the past three to five years. Also, make sure that an audit letter accompanies the statements from a reputable CPA firm. You should not accept a simple financial review by the business itself.
Tax Returns: Review the business's tax returns from the past three to five years. This will help you determine the profitability of the business as well as any outstanding tax liability.
Important Documents: Numerous documents should be checked during your investigation. Examples include property documents, customer lists, sales records, advertising materials, employee and manager information and contracts.
Professional Help: A qualified attorney should be enlisted to help review the legal and organizational documents of the business you are planning to purchase. Also, an accountant can help with a thorough evaluation of the financial condition of the company.
The closing is the final step in the process of buying a business. Keep in mind that you should have legal counsel available to review all documentation necessary for the transfer of the business.
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.
- Review Required Documents These documents should include a corporate resolution approving the sale, evidence that the corporation is in good standing, or any tax releases that may have been promised by the seller. Check with your local department of corporations or Secretary of State for more information.
- Signing Promissory Note: In some cases, the seller will have back financing, so have an attorney review any note documentation.
- Security Agreements: A security agreement lists the assets that will be used for security as a promise for payment of the loan.
- UCC Financing Statements Uniform Commercial Code documents are recorded with the Secretary of State in the state you will be purchasing your business.
- Lease: If you agree to take over the lease, make sure that you have the landlord's concurrence. If you are negotiating a new lease with the landlord instead of assuming the existing lease, make sure both parties are in agreement of the terms of the new lease.
- Vehicles: If the purchase of the business includes vehicles, you may have to complete transfer documents for the vehicles. Check with your local Department of Motor Vehicles to determine the correct procedure and necessary forms.
- Bill of Sale: The bill of sale proves the sale of the business. It also explicitly transfers ownership of tangible business assets not specifically transferred on their own.
- Patents, Trademarks and Copyrights: If there are any patents, trademarks and/or copyrights associated with the business, you may need to complete the necessary forms as part of the transaction.
- Franchise: You may need to complete franchise documents if the business is a franchise. See theConsumer Guide to Buying a Franchise for more information.
- Closing or Settlement Sheet: The closing or settlement sheet will list all financial aspects of the transaction. Everything listed on the settlement should have been negotiated prior to the closing.
- Covenant Not to Compete: It is a good idea to have the seller sign an agreement to not compete against the business. This will help prevent any interference from the previous owner.
- 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 This document will indicate how the purchase was allocated and the amount of assets, which are important for your tax return.
- Bulk Sale Laws: Make sure that you comply with bulk sale laws, which govern the sale of business inventory.