ForumsStarting a Business

1st - I would not have the seller type up the contract (the buy/sell agreement). You should have an experienced attorney handle that for you (to protect you) and also to conduct the closing. I suggest checking with two or three so you can compare what they will charge you. Discuss with the attorneys you choose that you are considering buying a business and need their assistance. Ask for a quote for their fees. The attorneys should also be able to give you a quote for forming the legal entity you should use to buy the business.

To find out about business licensing contact your local tax authority or business license department for your city/county. For other costs triggered by a change of ownership, you will need to contact their vendors to see if there is any transfer fees etc, or the process you would need to follow to continue to use them as a vendor/supplier. You will more than likely have to establish your business accounts with them since technically and legally, you will be a new customer.

Before spending money on the attorney and any licenses; I would discuss pricing and terms with the seller to come to an agreement on the deal. I would put that in a form of a Letter of Intent that outlines in plain language what you are offering for the business (price and terms) and make it subject to your final due diligence and ability to assume the current lease or to negotiate better lease terms (in other words leave you a way to walk away from the deal if something about it does not check out or you decide not to buy the business). Present that to the seller and if they agree to it then finish your due diligence and meet with your attorney to have the formal buy/sell agreement drafted up to submit to the seller.

It would probably be faster to get a personal loan intially, then loan that money to the business entity in order to make the acquisition. But talk this over with your financial advisor and attorney for how best to do that and have the proper documentation for your personal records and for the business records.

There are a lot of important things to cover when buying a business. So it is not practical to put them all here. But I will list here some of the high points that you should look at:

• What is the reason for the sale? Is the owner selling because he "wants" to do something else with their life or they "need" to because they see the business not doing as well in the future as it has in the past. The real reason for selling is very important to determine early on as best you can.

• With this type of business I'm sure that location is important. Is the traffic (I'm talking flow of people/customers/prospects etc.) volume in the area steady, going up, declining? Is the area growing, flat or declining? Does your city have any planned construction over the next 3 to 5 years that will disrupt access to the business? I have seen location sensitive businesses go out of business because of highway construction disrupting the traffic (of cars and people) in the business area.

• What is the revenue and net income of the business for the past 3 to 5 years? Check their financials for at least the last 3 years and see how sales and profits are trending. Are they going up, flat or declining?

• What do they forecast for the next 3 to 5 years? And are the projections realistic.

• How strong is the balance sheet ... i.e. are there assets with value and is the business carrying debt? If there is any debt, can it be assumed?

• Do they have appraisals to prove any value they are putting on the assets?

• Have they established an asking price? Do you know what they are basing their asking price on? Is that a realistic, fair and acceptable price?

• Will the owner carry back any financing?

I think with this business it is going to be important to establish the stability of the revenue (over the past 3 to 5 years and going forward for the next 3 to 5 years). Another thing to look at would be operating expenses. Are there any opportunities to reduce expenses and what is the outlook if you will face higher operating expenses than the current owners? And the question about the growth of the area, traffic flow, location and any planned highway construction is important to look at as well.

There are many more questions but the above will be critical when it comes to initially checking out the business as part of your due diligence.

I hope the above helps you or gives you some direction.

Dennis Lowery
Adducent, Inc.