Purchasing a business has the chance to yield major financial returns, but the process is not simple. There are many important aspects to consider before making a purchase. An unwise business purchase can lead to financial ruin, so potential buyers should take a methodical approach to the process and make sure all relevant factors are added to a checklist before purchasing a business.
Due to the complexities of business purchases and the potentially devastating consequences if they are not handled correctly, many individuals in the buying market seek professional guidance. The Ferlito Law Group’s veteran business lawyers help entrepreneurs handle business acquisitions the right way, protecting their legal and financial interests. Call us today to learn more about what to consider before purchasing a business.
Choosing the Right Business to Purchase
Individuals who are considering buying a business should carefully consider which type of business suits their interests and knowledge or skills, according to the United States Small Business Administration. If the buyer has experience in the same industry, they may have an easier time making the business a success. For example, a chef with two decades of experience in restaurant kitchens would likely have accumulated relevant knowledge related to running a successful restaurant of their own.
Choosing a business related to your interests and passions can also make running the business easier. The life of a business owner can often be stressful, and even the most successful businesses run into significant challenges. But those business owners who are motivated by a personal passion for what they do are often more willing to work towards finding solutions and continuously strive to improve the business and its profitability. However, there is also nothing wrong with making a business purchase solely because it will likely be a profitable investment, if the owner is committed to doing the hard work necessary to make the business a success.
The reason why the business is for sale is one of the most important questions to ask when considering a purchase. Some businesses on the market are for sale because the owner believes they are not financially viable, but the current owner is unlikely to disclose that information to a prospective buyer. Fortunately, buyers in the market can protect themselves by doing their due diligence to ensure that the business will be a profitable purchase. The Ferlito Law Group’s New York business lawyers can provide guidance regarding due diligence and all other steps in the real estate purchase process.
Thoroughly Review All Financial Documents
Prospective buyers should review all financial information for the business they should consider purchasing, including audited financial statements for at least the past three years. The owner may have taken certain measures to reduce taxes, so buyers should meet with the seller to discuss these financial documents as well.
A seller should provide the following financial documentation to a prospective buyer when discussing a sale:
- Income and cash flow statements
- Balance sheets
- General ledgers
- Accounts payable and receivable
- Credit reports
- Tax returns for the past three years, minimum
- Any debts and their terms and liabilities
- Gross profit margin analysis
- Fixed and variable expense reports
- Gross profits for each product and/or service
- An inventory and value estimate for all real estate, products, and equipment
Potential buyers should always complete this financial checklist before purchasing a business.
Research How the Business Operates and Turns a Profit
When considering a business purchase, buyers should familiarize themselves with how the structure and operations of the business. This could include the business model, products and services, customer base, and costs of operation. The research during this stage should also extend beyond the business into the industry at large. Information on competitors, the current market for the industry, and growing trends can provide valuable insight into the potential profitability of the business.
Review Contracts, Leases, Licenses, and Permits
All legal documents should be carefully reviewed when evaluating a business for potential purchase. Contracts and other agreements with suppliers and customers should be reviewed for any potential red flags. The landlord for the commercial rental lease should be contacted to determine if they are willing to transfer the lease to a new owner. All relevant licenses and permits should also be reviewed to make sure the new owner will have the required legal permissions to operate following the purchase.
Deciding on an Offer Price
The negotiation stage will likely take some time, as both sides of a potential sale are usually looking to reach an agreement that benefits them as much as possible. This process can often move more quickly with assistance from an experienced business valuation lawyer with negotiation skills and an understanding of how these deals work. The cost of attorney’s fees is often worthwhile, as they can potentially save the buyer significantly more money.
Along with negotiating financial terms, the two sides will also often reach an agreement on how long the seller will remain involved with the business after the sale and how everything will be transferred.
Finding Funding to Purchase a Business
While some business buyers may have the liquid funds to make the purchase on their own, most first-time business owners will need to consider how they will fund the purchase. According to the United States Census Annual Survey of Entrepreneurs, buyers borrow two-thirds of the purchase price on average. Some of the common options for raising capital to buy a business include:
- Personal funds of the buyer
- Forming a partnership to pool funds
- Arranging a financing agreement with the seller, where they agree to give a loan in exchange for regular payments
- Selling company stocks to employees, also known as equity financing
- Debt-based financing, such as term loans, SBA loans, and asset-based loans
Learn More from an Experienced New York Business Attorney
Buying a business involves careful planning, and anyone going through this process should complete an extensive checklist before purchasing a business. Additionally, due to the extensive amount of research, documentation, and negotiating involved with these purchases, it may be worthwhile to consider seeking legal guidance from an experienced New York business attorney. At Ferlito Law Group, our business attorneys help our clients make shrewd business performances and avoid pitfalls during the buying process. Contact us today to learn more about purchasing a business.