Steven E. Springer
PURCHASING AN EXISTING BUSINESS
The ideal that every U.S. citizen should have an equal opportunity to achieve success and prosperity through hard work, determination, and initiative is the American dream. For many, this includes owning their own business. Many choose to start from scratch and others to invest in a franchise. Yet, another very alluring option is to purchase an existing business. What makes it such a viable selection? What are the downfalls? What steps should be taken to proceed down this path?
For many entrepreneurs, purchasing a business that is already existing works perfectly for them. In many cases, the start-up costs are relatively low. This is because the business may already have their inventory, their building, the utilities are turned on, and all of the machines needed to operate the facility are in place. Also, the business already has some sort of a client base. Many already have the employees so hiring immediately would not necessarily need to happen. Theoretically, you can start operations from day one.
However, if you do not do your due diligence, you may be left stuck holding a lemon of a business. You may have to replace an entire staff. The business may have a bad reputation in the local market. Half of the equipment in the establishment may be in need of repair. The business may have a negative cash flow and owe thousands of dollars in debt with a lien on the building. There are a great many seemingly catastrophic events that could be waiting if proper research has not been completed.
In order to avoid making an investment that will cause you years of grief rather than years of great wealth and prosperity, it is advised to do your homework. First and foremost, you want to analyze yourself as a business person.
- Are you a good manager?
- Are you a good sales person?
- Do you have specialized training in the area?
- Is the business something you genuinely enjoy spending the majority of your time doing?
- What are your talents?
If after analyzing yourself in depth you still decide that this particular business would be a good match for you, you will need to begin with the due diligence process. Some areas that you’ll want to follow up in are:
- Permits and Licensures: Verify that this business has all of the proper paperwork completed to run the business at the federal, state and local levels.
- Zoning Laws: Make sure that the business is up to code on all of the zoning restrictions in the area. Do not assume that the current owner did this already.
- Environmental Regulations: Make sure that the business meets all of the environmental regulations if you are purchasing property in addition to the business.
Once all conditions are adequately met, proceeding with a purchase may be next appropriate step for you. Start with a letter of intent outlining the offered price if all of the terms and conditions are met. You will likely want to include a confidentiality agreement letting the business know that all of the information obtained during your research will be used only for the intent of purchasing the business. Next, there are a variety of forms that you will need to ask for:
- Contracts and leases: rental agreements or mortgages;
- Financial statements: from the last three to five years; and
- Tax returns: also from the previous three to five years.
Other important documents you should also have are:
- Customer lists;
- Sales records;
- Advertising materials; and
- Employee contacts.
Next is time to draw up a sales agreement. Throughout the process, it is sometimes easier to have another person to inspect the documents with you. Likely, you may want several qualified professionals and create a team for yourself. An experienced San Jose business lawyer will be able to help protect yourself and your investment starting from square one all the way through drawing up the agreement and closing. If you are in the Fremont, San Jose, or Morgan Hill, CA area and are thinking of a business acquisition, call us for your free 20-minute consultation today at 408-779-4700.