Purchasing an established small business is a great way to be a business owner while minimizing some of the risk associated with a start up. A business with an established product, client base, and brand name will allow you to jump right into operations; no need to create the product or find the loyal clients. However, before buying an ongoing business it is incredibly important to properly research the business. Here are just some of the documents that should be part of the review. Remember, each business is different and it is a good idea to consult with an attorney in the early stages of the buying process to ensure the transaction is smooth and free of surprises.
1. Organizational Documents
First and foremost make sure you know who you are dealing with. Is the seller a sole proprietor or a corporation? Does the person you have been negotiating with have partners who might object to the sale? This is all information that is easily ascertained by reviewing the organizational documents. These include the Articles of Organization and Operating Agreement for an LLC, Articles of Incorporation, bylaws and shareholders agreement for a corporation, and a partnership agreement for a partnership.
2. Deeds and Titles
It is essential to review the title if there will be a transfer of property during the sale. This will tell you who the owner of the property is and if the transfer is possible. This includes real property, such as land and buildings, and personal property, such as vehicles and other machinery.
The location of the desired business may be one of the most important factors in consideration. If the business has a lease a detailed examination is an absolute must. When reviewing the lease it is essential to consider: the duration of the lease and any possible extensions, the rent, whether the lease is assignable and how, the nature of any restraints on business activities, whether there is any protection from competition.
4. Trademarks and Trade Names
Does the desired business have a great name or logo you hope to use? Does the business own the trademark? If so, is it included in the sale? A review of who owns the trade mark or trade name is essential to know whether the name or mark will be transferred.
5. Structural Inspections
Just like having a home inspected prior to buying if the sale includes real property it should be inspected to ensure it is structurally sound.
6. Zoning Documents
For proper zoning, it is essential to check the local zoning regulations. Knowing this before completing the purchase can help save time, money and headaches later.
7. Tax Returns
Income tax returns can show details of the financial representations made by the seller, while sales tax returns provide valuable information about actual sales.
8. Employment Contracts
If the business has employees who are under contract, a review of those contracts is essential. These contracts will detail what the employee’s role is, what the compensation is, how long the employee must be employed and what the possible severance package is.
These are just some of the documents that must be reviewed before deciding whether the purchase of an ongoing business is a viable idea.
This post is for informational purposes only. It is not intended to be, nor should it be construed as, legal advice. Always consult an attorney, licensed in your state, before taking legal action.