If you are presented with the opportunity of buying an existing business, you may be attracted to the idea of walking into an income-producing business with a great location, a good reputation, and loyal customers. The price is something you can manage, and the owner says he is selling the business because he wants to move to another state to be closer to family.
It seems to be a good opportunity for you and one that you have been looking for. Maybe it is. Maybe it’s not.
What could be wrong? Plenty! Remember the Titanic? It was billed as the unsinkable ship that sunk when the invisible part of the iceberg ripped through its hull. Only one-tenth of an iceberg is visible above the waterline. It is the other nine-tenths of the iceberg that lies invisible beneath the waterline that is the danger. Keep this in mind as you consider whether to enter into an agreement to purchase the business.
When buying an existing business be suspicious, ask questions, and investigate.
The most important thing when entering into a purchase agreement is to make sure your offer contains provisions that will protect you from hidden hazards. Here are some of the things you should consider:
- What exactly are you buying? Are you purchasing all the stock of a corporation that owns the business or are you buying the assets of the business? Each method has different tax consequences.
- Are there any issues with the premises from which the business operates? Who owns the property? If there is a lease, what is its term and the provisions, including price terms, for renewal? What about utilities and zoning compliance?
- Are there claims by third parties against the assets or the corporation you are proposing to purchase? If it is a stock purchase, is the corporation a defendant in any lawsuits? Are there any tax liens by the federal or state taxing authorities against the business? Are the assets of the business subject to any U.C.C. liens?
- Although the owner has told you he is moving out of state, he may not have been truthful. Is he planning to operate a competing business in your market area? You must ensure that your purchase agreement contains a non-compete provision that is properly crafted so it will stand up in court.
The list goes on and on. Attorneys have many clients who made the mistake of taking verbal representations of a business owner at face value without conducting proper investigation and now find themselves challenging huge tax liabilities that they unknowingly assumed or litigating against the seller who is now operating a competing business to your detriment.
Consulting with an attorney familiar with these problems prior to entering into a binding agreement to purchase a business and having that attorney draft or review the purchase agreement is the “ounce of prevention” that is worth more than the “pound of cure.”
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