Avoiding Common Pitfalls when Purchasing a Small Business
1. Buy the assets instead of the business
Purchasing a small business includes assuming any debt accrued by the business. The buyer is also purchasing any potential liability from accidents or misconduct of the seller that occurred prior to the sale. This can be avoided if the new owner purchases the assets instead of buying the entire business. Taking this action also resets the tax basis of those assets to the current purchase price instead of the price the seller paid for them.
It is important to make sure that the assets are being sold unencumbered, meaning that they were not financed since any debts accrued may follow the assets. The assets, such as machinery or furniture, should be inspected and tested to make sure they are in good condition and fully functional. Also, the buyer should consider paying in installments so that if assets turn out to be damaged and require repair or liabilities are discovered down the line, deductions can be made from future payments. Purchasing assets is usually the better option for a small business owner. It is always wise to consult with an attorney to determine your best options.
2. Examine the lease
Leasing space is one of the most expensive aspects of running a business. Before purchasing, the small business owner should review all potential expenses, paying particularly careful attention to the lease. The purchaser should confer with the landlord to confirm that:
No problems will arise in the lease if a transfer occurs;
No back rent is owed; and
The premises are in good condition.
If the buyer intends to renegotiate the lease, it should be done prior to the purchase.
3. Evaluate the landlord
If there are other tenants in the area, the potential buyer should question them in order to assess the landlord’s trustworthiness. If other tenants have had problems with the landlord, it is likely that the new owner will have issues as well. If the prospective landlord does not have the reputation of being honest or reliable, it probably does not make sense to go through with the purchase.
4. Ensure a smooth transition
Many sellers do their best to hide the fact that the business is being sold from their employees. This can present serious difficulties for the new owner since, in order to continue operations after a purchase, it is crucial that key employees remain on staff to help ease the transition. A potential buyer should always speak with existing employees to confirm their competence and willingness to stay on. These key employees have ongoing experience in running the day-to-day operations of the business and are likely to be aware of problems with running the business that have not been revealed by the seller and are not immediately apparent to newcomers.
At times, the seller stays on to consult with the buyer for months after the sale to ensure a smooth transition. In any event, the buyer should always make sure that the seller signs a non-compete provision to prevent future conflicts.