About Buying A Small Business
Buying a small business can be very rewarding and also can be a lot of headaches. You must ask yourself, if you have the time, are you able to do the hard work, do you know what you are getting into? So tread carefully before you make the jump into being a small business owner. You will work long hours, if you get by the first five years you are on your way to success.
In this article MyDaddyHomes will try and provide you with information to help guide you in buying a small business. The article is not intended to be the complete tutorial on buying a small business but an insight into the details of becoming a small business owner.. Let's get started!
A FEW BUSINESS BASICS:
1) What is a business:
An undertaking carried on for the purpose of gain or profit and includes an interest in any such undertaking and without limiting the generality of the foregoing, includes a boarding house, hotel, beauty salon, pizza store, etc.
2) How Many Type Business Are There?
Essentially there are three types of business structures:
- Sole Proprietorship
3) Can A Residential Property Be Classified As A Business Property?
Yes! The income or potential for income can make a property have business status. Generally investment/Income producing properties are all businesses.
What Information Does The Seller Need To Provide To The Buyer:
A profit and loss statement for the preceding 12 months or since the acquisition of the business by the person disposing it.
A statement of the assets and liabilities of the business
A statement containing a list of all fixtures, goods, chattels, other assets and rights relating or connected with the business that are not included in the trade.
Lists of customer, suppliers and contracts
List of employees, including a breakdown of salaries, benefits and years of service
Because the above information is confidential the seller may ask the buyer to sign a non disclosure agreement to prevent the buyer from using it for any purpose other than buying the business. You will need to have your lawyer review all documents that you sign to ensure you are not making any unwise legal commitments.
It is important that the buyer receive from the seller the following:
- Terms and conditions under which the seller of the property holds possession of the premises
- Any sublets of the premises
- All liabilities of the business
- A statement that the person disposing of the business has made available the books of the account of the business.
- Check out if there are any any liens on the business assets; whether there are unpaid taxes.
- Get information on the flow of business activity, peak times. slow times, days of the week.
- Find out what competition is there within the area
- Find out what similar properties have sold for in the area
Should The Business Be Purchased As A Company Or Personally Own?
It is always better to buy a business as a company instead of being personally own. When you the business as a company you shield your personal assets out of reach from creditors of the business. Also buying as a company you have certain tax advantages and less risks. When you buy a business as a company you will need to know what you are buying, the assets or the shares of the business. Both have different ramifications.
Buying The Assets or The Shares
Buying the assets of a company gives you a better sense of the value of the business, you know exactly what assets and liabilities that you have purchased. If you are buying the shares of the company, you better do due diligence, because the shares may or may not have unknown or undisclosed liabilities.
How Can The Market Value Of A Property Be Determined:
Thee are three fundamental ways to measure what a business is worth:
- Asset Approach
- Market Approach
- Income Approach
1) The asset approach:
Views the business as a set of assets and liabilities that are used to determine the value of the business. The asset approach is based on the so-called economic principle of substitution which addresses this question.
2) The market approach:
Relies on information from the current market about what similar properties sold for.
3) The income approach:
Is about what income one can expect if an investment of dollars is made.
All three valuations methods will be explained in detail in future newsletters.
How Will The Purchase Be Financed:
Taking on debt to finance a property is fairly common, you need to crunch the numbers and look at all scenarios to ensure you can repay the debt. The lender will evaluate your business plan to ensure that your company has a chance of success.
Here are some ways debt can be financed:
Line of Credit
Business Term Loan
B) Equity Financing:
Equity financing is sourced from your own
personal savings and investors. Investors typically receive a portion of your company's equity in return for their investments. You must demonstrate to the investors that your business plan is strong and you can make them a profit money for their investment.
Own Personal Savings:
When you invest your own money, investors will be more readily to invest, as they see you are taking the risk of investing your money.
- Using Funds From Friends And Family:
Getting help from friends and family is another way of getting funding. When you use friends and family, ensure you do it in a business like manner, you do not want to lose friends and have your family upset with you if the business is a bust.
- There are many professional investors who seek out businesses to invest in. They want to make a profit and they also like to be involved in the management and planning of the business.
Making your intentions known to the Seller: Letter Of Intent:
Before an agreement of purchase and sale is drawn up, a document called a " LETTER OF INTENT" is created. This document is very important as it starts the process of formulating how the agreement of purchase and sale will take place. It should state that the agreement is non binding to either party. It states the intention of the Buyer to purchase the business.
What is the structure of a letter of Intent?
Due Diligence: Due diligence is a way of preventing unnecessary harm to either party involved in a transaction. Check! Check! Check! What needs to be done?
Reviewing of all financial records
It is critical that a background check is done to ensure no problems with City By-Laws, Environmental issues
Property inspections, know what you are buying
A check by the seller to determine if the buyer has the ability to purchase the property.
The Agreement Of Purchase and Sale:
The letter of intent has now been satisfied and it is now time to formulate the official document of agreement of purchase and sale. The agreement of purchase and sale stipulates what the seller and buyer has agreed upon and includes conditions if things don't go as planned. Two important parts of the agreement are:
- Non-Competition Clause: This assures the buyer that the seller will not start-up a new business within a radius of a certain distance of the premises for a certain amount of time after completion of the transaction.
- The Seller Represents and Warrants: One of the most important parts of this agreement for will be the seller's "representations and warranties". This effectively puts the seller on the hook for the information given to you about the business and aims to ensure that you are getting what you are paying for. The description of the business assets and liabilities related to the business that you will assume are another important part of this document. They are usually included in "schedules" attached to the main agreement.
Other clauses may be required based on the type of business being purchased, you will need to consult with your lawyer to ensure all bases are covered.
FINAL STEPS TO BE AWARE OFF:
- Keep Your Mind Focus On The Details Of The Agreement Of Purchase And Sale
Do not be so eager to become a business owner and ignore sound principles of buying a business. Before you sign on the dotted line, make sure you sit down with your advisors and review the details of the contract. Don't be a passenger on the boat of success, be at the controls.
I f the Deal Does Not Feel Right. Walk Away!
If you believe the seller is not trustworthy, not providing the needed information in a timely manner, has excuses after excuses, these are red flags telling you to WALK AWAY!
Lastly retain A Lawyer Who Is Experienced In Small Business Purchases To Help You With Your Purchase.