In today's Freedom Friday blog and email newsletter, I want to talk about something that I don't get asked about enough, but should be asked more often, and that's buying and selling a business. I've touched on this subject before in the Freedom Friday blog and email newsletter but wanted to talk about it again. So, in today's Freedom Friday and email newsletter, I'm talking about how to buy and sell a business in 2024.
First of all, if you're interested in buying an existing business, your biggest concern needs to be making sure the business doesn't have any underlying problems. If such problems exist, you need to make sure the responsibility for those problems does not transfer to you as the new owner. If you do find a business that interests you, you need to take time to identify whether or not there are any problems. Common problems that you might encounter include the current owner using business property as collateral for debt, existing debt in the business' name, any litigation, and/or current legal violations. Other than identifying any problems, the price of a business for sale usually corresponds with its revenue, which makes you also need to verify the revenue of the business you're interested in purchasing. During the due diligence period, you will need to verify the business' revenue, debts, hidden liabilities, and ongoing operations.
Meanwhile, when you're buying a business, it is common to offer “earnest money” as a commitment, just like the down payment for a new home. Just like buying a house, after viewing the property and deciding to make an offer at an agreed price, usually 1% to 10% of the value of the business is paid as earnest money as a sign of serious intent to buy the business. Once the earnest money is paid, a contract is formed, and a specific period of time is set for the buyer to conduct “due diligence” of the business. During due diligence, the buyer will thoroughly review the business's financials, operations, legal status, and other aspects of the business to make sure the buyer clearly understands the condition of the business before finalizing the deal. This process will help mitigate risk and allow the buyer to make an informed decision.
Due diligence is essential because unless the contract specifies otherwise, deciding not to proceed with the business after this period of time could result in the loss of earnest money and/or a potential breach of contract. During due diligence, investigating debt can be rather complicated, and a perfect investigation may be a challenge. However, businesses that use assets as collateral for debt are usually required by law to register the collateral. This is called a UCC filing. A UCC filing is designed to protect others in case someone, other than the owner, has a lien on the business or its specific property. As a business buyer, you should confirm whether or not the business has any liens or UCC filings as part of identifying any outstanding debts or liabilities against the assets of the business you're looking to purchase.
To avoid taking on hidden liabilities, you may only want to acquire the assets of a business instead of the business itself. As you're aware, many people operate businesses through established companies. If you create a new LLC and acquire only the assets of a business, you can minimize the time when the new owner assumes the previous company's liabilities. However, if you purchase the company operating the business, you will inherit its responsibilities.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at [email protected] to schedule a FREE strategy session.
For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com/
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