Buying an existing business is a very unique experience with its own rules and procedures. While all big purchases usually require some research, big purchases such as cars and houses are typically readily available. Existing businesses that are for sale, on the other hand, can be hard to find.
Even when you find a business you would like to buy, the process of thoroughly researching the business and closing the deal can take a long time. Being aware of the timeline of a business purchase can help you decide if it's really right for you. Knowing some common accounting and valuation terms can also be helpful, particularly at the negotiation stage.
When buying an existing business, you will also need to determine whether you want to buy stock or assets. An asset purchase involves buying the business's assets, such as equipment, inventory, and facilities. A stock purchase, on the other hand, means that you're only buying shares (equity). Regardless of whether you're buying stocks or assets, it's important to be well informed about the repercussions of each decision.
Business Opportunity Disclosure Laws
Some states have laws that address business opportunities in an effort to minimize fraud and increase transparency in such large transactions. Many of these laws ban the sale of a business unless the seller provides a potential buyer with a pre-sale document -- filed with a specific state agency -- giving certain disclosures. Generally, state business opportunity laws address every type of business opportunity that could be offered. Since each state's business opportunity laws are different, the required disclosures will vary; but most of these laws provide protections and remedies for investors in order to encourage economic activity. It's important that you research the business laws of your state before buying an existing business.
What Information Should You Get From the Seller?
While the future of a business is uncertain, there are specific types of information that can help you determine the chances of a business being (or remaining) successful. One important document to review is a balance sheet, which is used in figuring out a business's valuation and assessing the its financial health. Balance sheets use a standard accounting format, which gives people the opportunity to compare the financial statements of various companies.
There are also other documents and information that can help determine the financial status of the business. Federal, state, and local income taxes from the previous few years can help analyze the financial state of the business. Getting a list of all of the physical assets and the real estate that the business owns or leases can also be helpful in this determination.
Aside from financial data, it's important to get general information about the business as well. You should review the company's articles of incorporation, bylaws, and minute books, assuming the company has them. It's also a good idea to get the company's organizational chart, a Certificate of Good Standing, and a list of shareholders. Obtaining information about any and all employees – such as their job titles, wages, and benefits – will help determine your obligations if you buy the business. Finally, getting a list of current customers and contracts will indicate whether you will have a customer base as soon as you buy the business.
Getting Legal Help
It's a good idea to get help from an experienced business organizations attorney when buying a business. To prepare for your initial meeting with your attorney, you should gather as much information about the business opportunity and yourself. The information you provide should include details about any business partners, such as the percentage of ownership and contribution of each partner, and each of your management strengths and weaknesses.
If you would like help preparing for you meeting with an attorney, you can review and fill out FindLaw's Confidential Business Purchase Information Questionnaire. For information and resources related to running a business, you can visit FindLaw's Business Operations section.