Pitfalls to Avoid When Buying a Business
The economy is booming right now, and most industries are growing. This makes it an ideal time to think about buying a business. Being in business for yourself offers several advantages over being an employee. You get to set your own hours, be your own boss, and decide when and how you want to work. You can also enjoy several tax advantages, and your opportunity to earn income is not capped by the wages or salary you are paid, like when you work for someone else.
Though there are many advantages, it is important that you choose the right business based on your passion, skills, and budget, and that you avoid critical mistakes during the buying process. Here are four dangers to look out for when purchasing a business:
Purchasing the Seller’s Entity: The structure of a business acquisition is extremely important. If the seller has a corporation or limited liability company (LLC), do not purchase the business entity directly. If you are planning to be a sole proprietor, purchase the assets within the business. If you plan to have a corporation or LLC, form it yourself and use that entity to buy the assets within the business. This way, your “tax basis” is the current value of the assets rather than what they were worth when the seller first went into business. Having your own entity also gives you protection against any existing liabilities the seller’s entity may have.
Unfavorable Lease Agreements: Your seller may have a lease with a reasonable rent payment and other favorable terms and conditions. However, you need to find out how long is left on the lease, and if the landlord is willing to give you the same terms and conditions your seller has. If you have only a year or two left on your lease, you might want to consider negotiating an extension with the landlord right away to ensure that your business has more predictable long-term overhead costs.
Unpaid Employment Taxes: Even if you purchase the assets of a business and not the entity itself, you may still be responsible for any sales, payroll, or other business taxes that are not paid. Be sure the seller is current on all tax obligations. To give yourself an extra layer of protection, it is best to ask the state tax authority to issue a clearance stating that the business is current on sales and use taxes.
Prepaid Expenses: The seller may want to be reimbursed for a prorated portion of any prepaid expenses. Examples may include marketing expenses (such as yearly ads in the Yellow Pages) and security deposits they gave the landlord when they leased their business location. Find out ahead of time what reimbursements they will be asking for at closing, so you know what to expect.
The Importance of Professional Help: Purchasing a business can be complicated and confusing. If you are not familiar with the process, it can be challenging to navigate the complexities involved with this type of transaction. The best way to avoid the numerous pitfalls you may encounter is to work with a reputable business broker. Business intermediaries handle countless transactions each year, and their experience and expertise can be invaluable in ensuring a smooth and successful transaction.