There you are, about to take plunge and buy an existing business. But what, exactly, are you buying and what’s it worth? In order to make sure you’re not buying a massive liability that will only become apparent after you’ve owned and operated the thing for at least months (if not longer) you absolutely must pay attention to detail and do everything right on the front end. This is truly an area where an ounce of prevention is worth a pound of cure.
First and foremost: What are you buying? Basically, there are two ways of buying a business: an asset purchase or an equity purchase. A full discussion of the differences between the two (as well as what goes into the entire sale and purchase transaction) is far beyond the scope of this short blog post, but suffice it to say that you’re either (A) buying the assets (e.g., anything from the contracts you want to buy to the desks and chairs) and proceeding to use them in your own business, or (B) you’re literally buying the entire business (e.g., you’re buying the stock of the corporation that does the business, which brings with it the assets and the pre-existing liabilities). There are massive differences between the two, and beware that if you buy the equity (such as stock), you’re also buying the business’s liabilities. If you buy only the assets, the seller’s liabilities can be left behind (with certain exceptions, of course).
How much should you pay? Business valuation (i.e., an appraisal) is one of the key components of any business sale and purchase. There exists an entire industry of business valuation, and it’s run by appraisers whose practice typically only involves businesses (as opposed to real estate). You should engage the services of a reputable business appraiser at the outset to protect yourself from paying too much.
Depending on what the business does, you may also need to give notices to its creditors. Google “bulk sale notice” to learn more about one such notice you might have to give.
Of course, you should also retain a lawyer to represent you and to guide you through the process, and representing buyers and sellers of business is something I’ve been doing for my entire career. (Be sure to check out my blog post on what “warrant and represent” means and why it’s so important, particularly in the context of buying and selling a business.)
Greg Borman is an attorney in San Diego, California, who advises and represents businesses of all sizes and stages, as well as their owners. He can be reached at firstname.lastname@example.org or at (858) 232-7100.