Many buyers like the idea of buying existing businesses, rather than starting their own, in part because the process of buying an existing business might seem less daunting. Even when buying a well-established business, there are numerous aspects of the business you need to consider before finalizing the transaction.
Seller’s Reasons for Selling
The first item to investigate is the seller’s reason(s) for selling the business, to determine if those same factors will affect your desire to purchase it. Sometimes seller motivation has nothing to do with the health of the business itself, like the owner is retiring, or the parent company is restructuring. But if you dig deeper into this subject, you might uncover some red flags about the business and reasons you might not choose to be the next owner.
Profitability and Cash Flow
Profitability and cash flow of a business are usually the first topics potential buyers want to know about because they provide a picture about the stability and longevity of the business. Remember, while many sellers and brokers use these terms interchangeably, they are not the same. Profits and cash flow will tell you different things about a company, and you need to be diligent in investigating each.
Intangible Assets
Intangible assets are pieces of a business that you can’t see but that are extremely important to the business’ success. These may include assets like client lists, 800 numbers, patents, copyrighted property, and trademarks. Careful buyers ensure that the assets they need are included in the final iteration of the purchase agreement. Many intangible assets are fundamental to a successful continuation of the business.
Contracts and Leases
When considering whether or not to buy a business, a careful examination of all company contracts and leases is a must. Are they transferable to a new owner? Are they contributing to the profitability, or loss, of the business? What are the termination terms? Could the new owner negotiate better terms and conditions, and would the business be more or less profitable if new terms were applicable to the business? Some leases can be quite restrictive when it comes to sale of the business, a careful review of the building lease may mandate the sale structure.
Debts and Liabilities
Just as you need to consider the income and assets of the business you want to buy, you also need to look closely at the company’s debts and liabilities and understand the business’s ability to service those debts and liabilities before you buy. Whether the business is in the middle of, or subject to a pending, lawsuit or other legal issue, will have an effect on the value of the sale, Goodwill, customer recognition, as well as many other factors that a new owner may want to avoid.
If you are interested in buying a business, contact Larsen Law Offices, LLC, for a consultation. Business and Contracts Attorney Susan Larsen will ensure you consider all the pros and cons of buying and will negotiate the best agreement for the sale. Schedule your consultation today by calling (303) 520-6030.