Do your due diligence and lookout for red flags. Learn as much as you can about how the business’s operations from the current owner, including details about existing contracts, insurance policies, licenses, employee agreements, and commercial leases (http://jflawfirm.com/
Negotiate the purchase terms. Have a small business lawyer (http://jflawfirm.com/
Sign the sales agreement. Once you’ve agreed to buy the business and have determined the terms of the sale, you will make it legal with a sales, or purchase, agreement.
Determining the Value of a Business
There are a number of different methods to determine a fair and equitable price for the sale of the business. Here are a few:
Capitalized Earning Approach: This method refers to the return on the investment that is expected by an investor.
Excess Earning Method: Similar to the capitalized earning method, except that it separates return on assets from other earnings.
Cash Flow Method: This method is typically used when attempting to determine how much of a loan the cash flow of the business will support. The adjusted cash flow is used as a benchmark to measure the firm’s ability to service debt.
Tangible Assets (Balance Sheet) Method: This method values the business by the tangible assets.
Value of Specific Intangible Assets Method: This method compares buying a wanted intangible asset versus creating it.
Doing Research for Purchasing a Business
Once you have found a business that you would like to buy, it is important to conduct a thorough, objective investigation. The following list includes important information you want to include when researching the business you want to buy.
Letter of Intent: The letter of intent should spell out the proposed price, the terms of the purchase and the conditions for the sale of the business.
Confidentiality Agreement: A confidentiality agreement indicates that you t will not use the information about the seller’s business for any purpose other than making the decision to buy it.
Contracts and Leases: If the business has a current lease for the location, be aware that you may have to work with the landlord to assume any existing lease on the business premises or negotiate a new lease.
Financial Statements: Examine the financial statements from the business for at least the past three to five years. Also make sure that an audit letter accompanies the statements from a reputable CPA firm. You should not t accept a simple financial review by the business itself.
Tax Returns: Review the business’s tax returns from the past three to five years. This will help you determine the profitability of the business as well as any outstanding tax liability.
Important Documents: Numerous documents should be checked during your investigation. Examples include property documents, customer lists, sales records, advertising materials, employee and manager information and contracts.
Professional Help: A qualified attorney should be enlisted to help review the legal and organizational documents of the business you are planning to purchase. Also, an accountant can help with a thorough evaluation of the financial condition of the business.
Sales Agreement for Buying a Business
The sales agreement is the key document to finalize the purchase of the business. This agreement defines everything that you intend to purchase including business assets, customer lists, intellectual property and goodwill. If you do not have a lawyer to help you draft the terms of the sale, you should at least have one review the agreement before you sign it.
Checklist for Closing On a Business
The closing is the final step in the process of buying a business. Keep in mind that you should have legal counsel available to review all documentation necessary for the transfer of the business.
Questions? Call (305) 921-0440 or Romy@jflawfirm.com