Starting a new business or buying an existing business is a big step. For many, you may have worked for someone else or a big corporation for many years and have decided that it’s time to branch out on your own to explore the joys, and sometimes the frustrations, of being a business owner (i.e., your own boss).
Step 1: What type of Business do you want to Buy?
Do you have special skills, experience or education? Are you interested in getting out your current job or field and starting something brand new? Or do you want to stay in your field of expertise while having your own company? These are important considerations when looking to make a big change to start a business.
Buying a business with the connection to types of work you have done, and skills or experience you have developed, may ease the transition to business ownership and avoid a steep learning curve of a business or industry where you have no prior experience.
Step 2: Do you want to Start a Business or Buy an existing Business?
The benefit of buying an existing business is that, hopefully, the business has existing employees, goodwill and an established customer or client base, as well as many existing operational features such as a well-known location, a favorable lease and office equipment. Starting your own new business can also be exciting and a profitable opportunity.
Step 3: Locating a Business to Buy
One of the first things to consider when purchasing a business is the location. We have all heard the phrase “location, location, location.” There is some truth to this saying. Things to consider include do you want to stay close to home? How far of a commute would be acceptable?
Networking can be a way to find out about businesses that may be for sale. Additionally, if you work for a business, consider asking the present owner if they would consider selling the business. Other options include business brokers who help business owners obtain a buyer for their business. Remember, a business broker is hired by the seller, receives commission from the seller when the sale closes and has the seller’s best interest in mind. That means that while a business broker may be a good avenue to find out about businesses for sale, you want to have your own team of advisers during this process who have your best interest in mind.
Step 4: Due Diligence
Once you have identified a potential business, it is important to do your “due diligence” and learn as much as possible about the business. This means obtaining copies of several years of the business’s financial records, contracts, employee information, leases and other relevant and important information about the business.
A thorough and detailed review of these documents will help you understand how the company operates and highlight potential problems. This is a good time to hire a good lawyer and a skilled tax advisor to help you evaluate the business and the documents that you obtain about the business. This evaluation is crucial to determine whether this is a good business to purchase or whether you may want to move on to the next opportunity.
Frequently a business owner will request that you sign a confidentiality agreement because you are requesting and will review their private business documents. This agreement assures the business owner that the information provided will only be used to evaluate whether to purchase the business and for nothing else. It is important to have an attorney review this confidentiality agreement prior to signing the document.
During this process make sure to inspect the physical building, inventory and equipment of the business. If the building is leased, talk with the landlord to determine whether you would be able to assume the lease or whether a new lease would be required. It is also wise find out whether equipment is leased and confirm that a new owner would be able to continue the lease.
Step 5: Are you buying the Business Entity or the Business Assets?
This step sounds rather complicated but it is not. If the business operates as an entity, a corporation or limited liability company, the business entity can sell its assets or it can sell the business entity itself which owns the assets. When you buy the business entity, you purchase the membership interests for a limited liability company or the stock for a corporation. If you encounter this scenario when purchasing a business, it is suggested that you contact your attorney and your tax advisor to help you determine which option is most beneficial. Additionally, when a business entity is involved there are additional governing documents that should be thoroughly reviewed in evaluating the business during the due diligence period.
Hire an Attorney to Help you through this Exciting Process
We are skilled in helping you to evaluate a business purchase and protect your interests. Our experience can help to educate you about what to look for and potential problems. Contact us at (925) 463-9000 or send an email.
Lisa Wills of the Law Offices of Lisa D. Wills is an experienced business law attorney in Pleasanton, CA helping educate prospective business owners to make good decisions regarding business purchases. If you want solid legal assistance regarding your business purchase, contact Lisa Wills, Law Offices of Lisa D. Wills at (925) 463-9000 or send an email.