Deciding to buy a business can be life-changing. It can take up a considerable amount of time and resources, so it is important to make sure that you are making the right choice before you buy the business. Asking the right questions can go a long way to determining if you are purchasing a viable business option or business on its last leg. Consider the following points before you dive in headfirst.
Why does the owner want to sell the business?
Sometimes an owner’s rationale for the sale of a business is as simple as the owner wants to retire. However, when owners sell, it may be an indication that the business is headed for financial or legal troubles. Have a frank discussion with the owner about why they are selling the business and any potential problems that may be affecting their decision.
What about sales taxes and payroll taxes?
Sometimes businesses get in trouble for failing to pay their taxes. Small businesses whose owners do not fully understand their tax obligations sometimes have this issue. Be sure that when you purchase the business, you are not facing problems with the IRS or state tax entities when you start. It will also be helpful to know how the business is handling payroll before you purchase as well.
For example, did the business use an accountant for these services? Or, did the owner deal with payroll and taxes on their own? If the owner is handling tax matters on his or her own, this may be a red flag.
What will happen to outstanding contracts?
Sometimes when businesses switch hands, contracts that have been in place for years may become void. If the company has significant long-term clients, who have exclusive contracts with the business, you may need to determine if these contracts will continue. You cannot assume that any client that the former company had will continue when ownership changes.
How can you get in touch with the seller after the transaction?
If you have questions or concerns after you purchase the business, contacting the seller will be the quickest and easiest way to get these issues answered. Do not let the seller run out after the deal. Being able to contact the seller will also help you deal with potential liability accountability issues as well. From a practical standpoint, it will be nice to be able to communicate with the seller for tips, tricks, and suggestions on how to run the business that he or she has been managing for years.
Is purchasing a business a good decision for you right now?
You have to take a hard look at not only your finances but also the practicalities of owning a business. Who will run the business to go on vacation? How will you cover expenses for your home when sales are down? Sometimes people get so excited about the prospect of purchasing a business that they forget some of the everyday responsibilities that go into running your own business.
If you have a spouse, it is important to talk to him or her about their feelings about the business. Small businesses often become a family venture because of the strains on schedules and resources. Be sure you understand what you are getting into before you sign on the dotted line.
How much hands-on management did the prior owner have?
Some people buy businesses as an investment. Others purchase a business so they can get their hands dirty and produce goods or provide services. You need to determine what this business means for you in that respect. In addition, you also need to determine how the prior owner acted. If the previous owner functioned more as an investor, it might cause friction if you come in and want to be more hands-on. Having an understanding of the prior owner’s role, and determining whether you want that position to change, should be an important part of deciding whether purchasing this business is right for you.
Contract Drafting and Negotiation
After the parties agreed on the price and general terms of the business sale, it is time to negotiate and draft the sale contract. Contracts govern the terms and conditions of the sale, according to New Jersey law. These contracts usually include the rights and remedies of both parties. Negotiating and drafting the contract is usually the most crucial part of the transaction.
Often, contracts include the price as well as warranties. Contracts will detail exactly what’s being sold and how much. The Contract will also establish who is responsible to pay for business liabilities. There will be restrictive covenants in the contract and they will define the current and future environmental liability of the business.
The contract will also cover the financing for the sale. The seller can agree to pay a portion of the purchase price in installments (known as seller financing) or the financing may also come from a bank. The contract will usually include a promissory note with security provisions and a payment schedule.
The contract will also include real estate matters and will provide details on how to deal with existing clients and address the transfer of a lease if the company rents.
When buying a business, it is important to seek the legal advice of an experienced real estate attorney. A skilled lawyer from the Matus Law Group may be able to help you make the most out of your purchase.
Getting Legal Help
You should not purchase a business without consulting an attorney first. Many legal obligations must be met in the procurement process, and having an experienced professional to help is extremely important. Contact the Matus Law Group for more information or to set up an appointment.