4 Steps How To Buy A Small Business (USA)

(doylc.com) How to Purchase a Small Business (USA) - One way to become an entrepreneur is to acquire a small business. Buying a small business is probably less risky than starting your own. But it can't get any cheaper. You need to hire professionals to help you evaluate the deal and draw up the necessary legal documents. You also need to start looking for financing early on. When you complete the sale, make sure you submit the necessary paperwork to the government.

• Finding the help you need

Consider hiring a business broker. A business broker can help you find and evaluate potential businesses. They can also help you in the negotiation process. Although sellers usually have business brokers, more and more buyers use them as well.

Business brokers charge a commission, so they are not free. The fee is usually 10% of the purchase price.

Brokers also do the same jobs as lawyers and accountants, so it may be cheaper to skip the broker altogether.

Hire a lawyer. You should probably get an attorney to help you through the process. An experienced lawyer can help you properly value the company and make a competitive offer. The lawyer can also help you secure the necessary financing in time to complete the sale.

If you don't have a business attorney, you can get a referral from your local or state bar association.

Contact an accountant. You'll also likely need the help of an accountant to understand the financial documents you're looking at. You should make an appointment with a tax advisor, who can be found in the following locations:

Ask another business owner if they would recommend their accountant.

Get a referral from your attorney.

Get a recommendation from your state's Society of Certified Public Accountants.

Visit the Small Business Administration office closest to you. The SBA and local resource partners provide mentoring, advice and training. For local assistance, visit the SBA website at https://www.sba.gov/tools/local-assistance. Enter your zip code.

For example, the SBA can help you draft and revise a business plan to present to potential lenders.

The SBA also offers a wealth of online tutorials that address a variety of issues associated with starting a small business.

• Analyzing the business

Draft Letter of Intent (LOI). This document opens the discussions. It is not an offer and does not obligate you to purchase the Company. However, it's a way to discourage others from buying the company while you investigate. The letter should contain the following information:

Your proposed purchase price

The assets you want to buy

An exclusive negotiating right for a limited time

All conditions for the sale of the company, such as B. Evidence at the close that the company is worth a certain amount

Sign a confidentiality agreement. Business owners may be reluctant to show you the books if they think you would disclose their financial situation to others. Accordingly, you may be required to sign a confidentiality agreement.

Make sure you clear the agreement with your attorney first.

Study annual accounts. Get copies of the financial statements for the last three to five years. They should be audited statements with an audit letter from a CPA firm. Don't just accept unchecked returns that have been checked by the company.

Pay attention to the owner's discretionary income. This is the amount left over after deducting rent, overhead, and staff costs. If the ODI goes down, then be careful. The best days of the company are likely to lie behind them.

Be sure to pull your CPA into the analysis so you understand the financial health of the small business.

Check tax returns. Don't make an offer until you've looked at the company's tax returns for the last three to five years. By studying returns, you can estimate how profitable the company was, as well as its tax liability.

You also want to make sure the owner paid the sales tax correctly. After you buy a business, you are responsible for any sales taxes that the current owner has not paid to the government.

You should also obtain a government "No Objection Certificate" stating that the tax authority will not pursue you for the sales tax owed.

Ask to see accounts payable and accounts receivable. You can determine the company's cash flow by separating 30-, 60-, and 90-day receivables and payables. This way you can see if the company is paying their bills on time and if their customers are paying their bills on time as well.

Check current liabilities and debts. A profitable business can have high liabilities, so you need to check if the business is facing any legal issues. You can request that the business owner provide you with a list of:

Business debt

Any lawsuits filed against it

Any liens on the business

Other claims

Check out other important documents. In addition to tax returns and annual financial statements, you would also like to request and study the following business documents before submitting an offer:

contracts and leases. If there is an ongoing lease, you will need to work with the landlord to take over the ongoing lease.

customer lists. You want to make sure the company has a customer base that is reasonable for a company of its size.

Employee and manager contracts. If you intend to retain employees, you must understand what they will be paid and the terms of their employment.

promotional items.

Examine the company's reputation. You can't just rely on numbers and tables. Instead, you need to understand how respected the company is. If you buy a company with a bad reputation, prepare yourself for failure.

Stroll around town and ask the locals about the shop. You can talk to people in the library, coffee shops, or senior centers.

Also, check with the police to see if any complaints have been filed against the company. You can also review complaints with the Better Business Bureau.

Discuss whether the current owner will stay. You should discuss all employment considerations such as salary and benefits. If the current owner wants to leave the company, you need to discuss a possible "non-compete agreement".

This is an agreement that the current owner signs and agrees not to work for a competitor or start a new business within a specified period of time.

You may have to pay more to the company if you want the owner to agree not to work for a competitor.

Consider the company's potential for success. A company that has been successful in the past may not remain so. You should consider whether the business will be successful in the future. For example, think of the following:

Is the company in a city that is going downhill? Is the location no longer popular with consumers?

Think about the company's biggest competitor right now and whether a new competitor is considering opening nearby.

• Get funding

Identify Different Potential Funding Sources: If you don't have a bunch of cash, you'll need financing to buy the small business. You have many options, including the following:

Incorporation rollovers (ROBS). You buy a business using the money in a retirement account. As a rule, you will have to work with a company that specializes in this type of financing.

SBA loan. The US Small Business Administration works with lenders to guarantee certain loans. With the guarantee, the SBA undertakes to repay part of the loan in the event of default.

Classic bank loans. If you don't qualify for an SBA loan, you can get a traditional loan.

Vendor Financing. You may be able to get the seller to fund the sale. This is not available in all situations and the seller may only fund part of the sale price.

other credit. You may also be able to get a loan from family or friends, or possibly get a home equity line of credit.

Consider a ROBS. With a ROBS, you're using equity built up in a retirement account like a 401(k) or 403(b). You can release the money to use within 3-4 weeks. You will not incur any taxes or penalties.

However, ROBS have many downside risks that you should think through before proceeding. For example, you need to work with a company that specializes in ROBS. This company will likely charge a hefty fee.

There are also annual reporting requirements to the IRS.

You're also putting your pension at risk if the business fails. Once you spend the money, it's gone.

Research SBA loans. You will not receive an SBA loan from the Small Business Administration. Instead, you can get one from a bank and the SBA supports it. SBA loans offer competitive interest rates and have the longest payback periods.

However, you generally need excellent credit – a score above 680.

You also need a large deposit, e.g. B. 10-30% of the business price.

Create a business plan . If you want to get a loan from a bank—even an SBA loan—you must provide the lender with a business plan. Your plan should explain why you want to buy the company. It should also include financial projections for at least three years.

Start the credit process early. Each lender has different requirements and different forms that you need to fill out. You should call as soon as possible. Here are helpful tips for securing funding:

Check your credit report before applying for a loan. Correct any errors in the report. If you have bad credit, you need to fix it as soon as possible.

Try to get pre-approval from a lender. You must provide information to the lender in advance, e.g. B. the company you want to buy and how you want to repay the loan.

Get pre-approval from more than one lender. Bank credit requirements are subject to change by closing. If so, you can switch to another lender.

Prepare to pay 15-20% as deposit.

identify collateral. Banks are reluctant to lend to small businesses. Accordingly, you may need to pledge assets as security. Some banks want to see enough collateral to cover 50-70% of the loan amount.

• Closing of the deal

Adjust your listing price. You may need to adjust the price based on your due diligence. You should negotiate with the owner. Be prepared to support each price with reasons for lowering the amount you stated in your letter of intent. The price should reflect:

Any prorated rent

Utilities and Other Fees

Value of inventory

Accounts receivable and accounts payable

Enter a purchase agreement. You should have your lawyer draw up a sales contract. If the seller's attorney draws it up, you can have it reviewed by your attorney. The bill of sale finalizes the sale and lists the business items you have purchased, such as: B. Customer Lists and Intellectual Property.

Check the required documents. You want to make sure the sale is legal, so there are many documents that you and your attorney will need to review when closing. Make sure you go through the following:

Proof that the company has a good reputation with the state

Tax exemptions

Shareholder resolution approving the sale

Any promissory note if the seller offers financing

Obtain a bill of sale. The sales contract is proof that the sale has been completed. Upon closing, you and your attorney should review it. You will want to keep a signed copy. It is also the document that transfers ownership of business assets.

Fill out the closing or settlement sheet. This document lists the details of the sale. You should have negotiated or addressed everything listed on the comparison sheet. Your lawyer usually prepares this document. However, if you use an escrow agent to complete the sale, the escrow agent will prepare it.

Dealing with security agreements. When you received financing, you probably had to pledge assets as "collateral" (collateral) on the loan. This means that if your creditor is late in paying, you can seize the assets. Upon completion, you likely had to sign security agreements.

You must also register these security interests with the Secretary of State of the state where you acquired your small business. Your attorney should be able to process this filing.

Complete the appropriate IRS form. You must complete IRS Form 8594 Asset Acquisition Statement. The form shows the amount of assets and how you acquired the company. You will need this information for your tax return.

The form and its instructions are available at https://www.irs.gov/uac/form-8594-asset-acquisition-statement-under-section-1060.