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Mistakes to Avoid When Buying A Business

Mistakes to Avoid When Buying A Business Newsletter

Buying a business can be a complicated process and depending on the nature of the company you are purchasing, can pose unique challenges. The most common challenge that many people face when purchasing an existing business is the issue of operations. In this week's newsletter, we here at Interactive Accountants want to go over some useful tips on things to avoid and remember when buying a business.

As we have said many times before, each situation is unique. What we mean by this is that most businesses operate on slightly different systems, whether it be different computer systems that need to be updated or synced or full-scale re-education of existing employees if you choose to keep them on. The point is that when you buy a business, there will be many hidden variables that may be difficult to navigate. In this article, we hope to give our readers a bit of a map of this situation and, more importantly, urge you to call us with any questions.

Things to avoid

One thing to avoid right off the bat will be not filing a bulk sale notification; while most states no longer have these, we would be remiss not to remind you of them as we operate in various locations. The easiest way to avoid any issues with this is to make sure you inform the seller's creditors of the transaction. Failure to do this can result in the cancelation of the transaction or further expenses. Additionally, the state may impose sales taxes on the entire sale instead of the items that actually apply. Some states even will carry over unpaid sales taxes from a seller to a buyer, if a bulk sale is not filed.

Another common mistake is to make a stock purchase instead of an asset purchase. Now sometimes this can’t be avoided, due to contractual arrangements, but asset purchases normally have better tax deductions available in the future. When buying a business, you are not investing in the existing company; you are purchasing the business's assets and assuming the expenses attached to such entities. When doing this, you want to ensure that you buy more assets than expenses. The best way to do this is to not skip any steps in the information-gathering stage of your plan. This means taking an in-depth look at the business's profits and expenses history, their tax history, and not forgetting to look at the area or market you are trying to get into and see what changes may be needed.

Things to remember

One thing we have to share for you to remember and consider along your business venture is to remember your goals and needs. One good example is if you are buying a business with a leased property. You first need to consider if you want to take on that lease and continue to operate through that property the business originally held, or if you need to go about ending the lease and making sure all of the assets attached to the business go with you. The main factor to consider here is whether or not physical locations are as important to your business as others. For example, our accounting firm here at interactive accountants does need physical locations to have office space and hold meetings, but at the same time, a lot of what we do can be done over the phone or online. In our past, we have gone about the action of incorporating other smaller accounting firms into our own. Some businesses may be able to save some money if you are only purchasing the domain of the business versus if you are purchasing the domain, the location, the equipment, or other types of things that you would see in a more centered business in the physical world. Such as medical offices or restaurants which are businesses that operate in a set location and require a certain amount of physical space and tools to function.

Another little snippet we want you to remember as you buy a business is to negotiate a letter of intent, sometimes called a term sheet. A letter of intent is a short agreement between the buyer and seller of a business that spells out all the important terms and conditions of a sale. Things you will find in a letter of intent include, but are not limited to, the price that will be paid for the sale, a list of assets that will be purchased in the sale, and sometimes but not always, you will see a draft of what the buyer plans to do with the purchased business. While these are not technically legally binding to either of the parties, it is worth the effort to go through them because it forms a layer of trust in the sale. When you have trust involved in a sale, there is always the potential for more compromise to be made as the sale unwinds. For example, if you have a good relationship with the person you are going through this transaction with, you may get additional benefits or even reduced pricing. The big point here is one we have made many times throughout our newsletters: the human variable will always be important when dealing with business. You need to know the type of person you are engaging in a business activity with; hopefully, this will serve as part of your research along the way.

Last thing to remember is to always consult professional advice along your way. You should always engage an attorney to facilitate the closing of your purchase, and you may also want to engage a valuation expert to help you ensure the price you’re paying isn’t too much. Lastly you may want to think about hiring some professional consultants to assist with your due diligence before pulling the trigger, especially on large acquisitions.

The next step

Individually we would love to consult with you and your business to help create an effective business strategy to address your individual concerns and help you succeed. Here at Interactive Accountants, assisting businesses to grow and succeed financially is our number one goal. We are here to help because the better you do, the better we all do! If you're still not convinced yet to give us a call, feel free to look at our other blogs regarding the help we offer various businesses and offices.

Interactive Accountants specializes in accounting for law firms, accounting for doctors, accounting for dentists, accounting for ecommerce and accounting for amazon dsp's. If you are a professional in any field that these tips apply to or are simply curious about a topic touched upon in this article, please feel free to schedule a free consultation here with our owner Matthew Shiebler, CPA. He's been practicing accounting for over 25 years now and is a business owner, just like you!