CHAPTER 3: BUYING A LOCAL BUSINESS

OBJECTIVES: To find the factors you need to consider when purchasing a local business. To get a better idea of what types of actions and responsibilities you will have as a prospective business purchaser.

A true sales agreement should require the seller to put in writing and warranty every essential part of the business that will make it a success or failure. Purchase Agreements

This includes that warranting that the financial are true and correct, that there are no hidden income tax claims or litigation, that the business has made a certain amount of money and will continue to make a certain amount of money. Purchase Agreements

Purchase Agreements should include:  Financial Statements  The type of note that you will sign  A list of creditors and accounts receivable  A list of claims and pending litigation  A complete list of the outstanding contracts, inventory, fixtures and equipment you are purchasing, together with their value and the basis of evaluation.

Review Financial Statements An experienced CPA familiar with business acquisitions should examine not only the current financial statements of the seller, but any projections or forecasts he or she has made.

Financial Statements For a business enterprise, all the relevant financial information, presented in a structured manner and in a form easy to understand, are called the financial statements.

Financial Statements typically include: Statement of Financial Position: also referred to as a balance sheet, reports on a company's assets, liabilities, and ownership equity at a given point in time. Statement of Comprehensive Income: also referred to as Profit and Loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. Profit & Loss account provide information on the operation of the enterprise. These include sale and the various expenses incurred during the processing state. Statement of Changes in Equity: explains the changes of the company's equity throughout the reporting period Statement of Cash Flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.

BULK SALES LAW If you purchase a business, the bulk sales law requires you to perform certain duties to ensure that the rights of the seller’s creditors are protected.

BULK SALES LAW "Bulk sales" laws are intended to prevent business owners from defrauding or evading creditors by transferring all (or a substantial portion) of the assets of the business to another individual or entity. The law is also intended to avert the possibility of businesses selling their assets below fair market value in a "sweetheart sale," in which the owner of the business manages to maintain a degree of control.

Purchase Price Always remember: the purchase of a business is like an investment in any other type of endeavor – you are seeking a fair and reasonable return on your investment

Purchase Price You must ask yourself whether you can afford the down payment and the installment payments that you will be required to make in future years.

Purchase Price Look not only at the costs of operating the business but also the contracts that accompany such costs.

Location of the Business Will this location be available for a substantial number of years? Is there any possibility of a major competitor coming to the immediate area? If so, what effect would this have on the business that is for sake? Can the business be relocated without loss of profit? Is the present lease presentable? Questions you may want to raise in considering the location of the business you’re thinking of buying:

MARKET ANALYSIS Major companies that are generally successful in opening a new location normally conduct a market feasibility study beforehand.

FEASIBILITY STUDY Feasibility studies aim to objectively and rationally uncover the strengths and weaknesses of the existing business or proposed venture, opportunities and threats as presented by the environment, the resources required to carry through, and ultimately the prospects for success.

If you are buying a business whose particular trade name is the key to the purchase, make sure your purchase agreement contains a provision stating that: You can use the name The seller represents and warrants that such name is his or hers and not is not subject to litigation by any third party claiming to have rights to the name.

COMPETITION Most real estate agents will advise you of buildings that might be available to competitors in your line of business.

COMPETITION In addition, ask the seller if he or she will include in writing a covenant not to compete that ensures he or she will not compete with you in a specific geographical area and for a period of time that is reasonable and enforceable under your state laws.

Checking the Seller’s Background It is a good idea for every potential purchaser to study the local county court records to determine whether or not any litigation has been brought against the seller.

Checking the Seller’s Background When checking the background of a seller, you may wish to use the checklist. This checklist will help you obtain some of the information discussed in this chapter.

 Obtain information on the background of the business and its owner.  Obtain the seller’s financials for the past 3years.  Obtain copies of all leases on location and equipment  Obtain an accurate list of all equipment, fixtures, inventory, and supplies – particularly heating and air conditioning.  Obtain copies of all maintenance agreements on equipment.  Ask about potential or actual liability claims against the current business.  Find out if a bulk sale law is applicable. Checklist of Information to Secure from the Seller of an Existing Business

 Run a credit check on the seller  Question current and past employees on their views of the business  Check the sellers’ cash-flow analysis charts  Determine whether the seller’s present prices for his or her products or services are competitive.  Check with suppliers to verify actual prices of inventory and stock items.  Prepare pro forma sales projections in the form of profit and loss statements for the next two years.  Make sure the business’s past success was not due to the personality of the seller.  Secure a valid not-to-compete covenant from the seller.  Do a market study of the area or hire a qualified person to do this for you. Checklist of Information to Secure from the Seller of an Existing Business

 Find out if any competitor’s particularly high discounters, are looking for locations in your area. Make it a practice to contact real estate commercial brokers in your area as the source for this important information.  Talk to the seller’s customers and find out why they patronize the business and their thoughts on improving the business.  Check with owners of similar businesses for their opinions on the merits of making money in their line.  Check with your bank on the availability of funds to you and the cost. Checklist of Information to Secure from the Seller of an Existing Business

 Find out if the seller’s present lease is assignable on the same rental terms.  Check county records for lawsuits and claims against the seller.  Check with the local county or state agency where liens are filed – usually in the secretary of state’s office and determine whether any liens have been filed against the seller and the seller’s premises.  Find out why the seller is selling his or her business. Checklist of Information to Secure from the Seller of an Existing Business