Purchasing an existing business has numerous benefits. The company, physical location, employees, and customer base are already established, saving the buyer the time and energy required to start a new company. Buying an already established company is appealing to many individuals because it is less expensive than attempting to start up a new business. Other benefits and advantages include:
- An established customer base;
- Established location;
- Easier to handle and manage from the beginning; and/or
- Comes with inventory and machinery.
Financial Past of the Business
Before making an offer on an existing corporation, a buyer should thoroughly research the company's financial history. Items examined should include:
- Certified financial records of the existing company;
- Employee files, contracts, and benefits;
- Past lawsuits, if any exist;
- Any contracts the company has with other companies;
- The business' lease(s); and
- Any other documents that will apprise you of the problems and potential of the business.
How Much Should I Pay for a Business?
Paying the right price for a company is very important. There are a number of different ways to figure out the value of a corporation before purchasing it. Here are a few:
- Capitalized Earning Approach: This approach determines to the return on the investment that is expected by the buyer.
- Excess Earning Method: What are all the different ways you can earn through the company
- Cash Flow Method: Determine what the typical monthly cash flow is and whether the purchase price of the business is high or low compared to the cash flow.
- Tangible Assets (Balance Sheet) Method: How much assets come with the purchase
- Value of Specific Intangible Assets Method: What is the value of all the assets and equipment you are purchasing
Selling a Business
When you decide to sell your existing business, you must be ready to commit some time to organizing all your financial documents and getting the company in order. Also, you should do your best to make sure that the company is not currently facing any legal problems or is at risk of being sued any time soon. That way, there will be no major disruptions during the transfer of the company from one owner to another.
What Should I Do When Preparing to Sell My Business?
- Update financial records: Update and organize the financial records of the company.
- Hire an agent: An agent can help you advertise the fact that your company is for sale and get offers for your business. This individual will also be able to advise you of whether certain offers that come in are worth consideration.
- Value the business: The value of your company can be determined from the financial status (profits, etc.) of your company and the reputation.
- Speak with a lawyer: An attorney can ensure everything is in order for the sale. The attorney will also help you with any sales contracts.
What Should Be Included in the Sales Agreement?
Sales agreements and sales contracts for a sale of a company need to be full of details and describe the sale of the company. When you draft a sales agreement, these legal terms should be included:
- A detailed description of the goods and services you are selling with your corporation;
- The total payment due along with the time and manner of payment;
- A clause stating that both parties must agree and approve for any changes to the agreement in writing;
- How long the buyer has to inspect the building the company resides in;
- The state whose laws will govern the agreement;
- Financial arrangements, such as how the buyer intends to pay for the company;
- Description of the real property (real estate, buildings, etc.), if any, and the personal property (machines, furniture, etc.) to be transferred;
- The minutes of the corporation organization authorizing the sale, if the business keeps minutes; and
- All warranties of the seller.
Drafting business agreements can be complex and tricky. Hiring an experienced contracts lawyer is important to make sure all the necessary terms of the contract are included in the sales agreement.
What Happens to Debt When Selling a Business?
Unfortunately when selling a company, debt will still remain and creditors can still come after you for the corporation’s debt. The buyer should get a list of all the creditors of the seller and notify them before they take over the company. The notice should include such items as the purchase price, the names and addresses of the buyer and seller, and the new address where the seller may be reached, among other things. Check with your local laws for the exact requirements. Here are some options when dealing with business debt when selling a company:
- Consolidate the debt with low interest loans
- Sell assets to pay down the debt
- Contact creditors early and figure out a solution
- Cut other costs and use that money to pay down the debt
Should I Consult an Attorney When Buying or Selling a Business?
Business acquisition and selling a company involves many negotiations and contracts. A business attorney can assist you in the negotiation process to help you get what you want for your future business. An attorney can also help you sift through financial documents to determine what is relevant to the sales transaction. A lawyer can also arrange the real estate sales process, should you ultimately wish to buy or sell the business property.