There are many advantages to buying an existing business, one of which is that it is already established. There is a working business model, employees, assets, products and services, and customers already set up. With the foundations already in place, the business’s new owners can pour their efforts into making the acquired venture more profitable.
Buying a business can be much safer than starting a new business, particularly in 2021, when there is a lot of uncertainty about how things will unfold.
Some businesses in tech and other industries have done very well in 2020 and will be expected to continue to do well in 2021. However, many businesses were adversely affected by the pandemic. The good news is that many of these businesses are expected to bounce back in 2021 as the vaccine reduces the COVID-19 cases. By the second half of 2021, many expect the economy to go through a strong growth phase with pent-up demand for many of the services and products that many small and mid-sized businesses offer. Buying a business in 2021 will allow you to capitalize on these growth opportunities.
However attractive this option is, buying a business is also a long and complex process. It will take months, or even a year or more, to buy a business. There are many factors to consider carefully, including the following:
Understanding motivations, both yours and the seller’s, is key to aligning your objectives. Is the business up for sale because the owner needs to liquidate assets? Maybe they are retiring and have no direct successors for the business. Or, maybe they have been hit hard by the recession, and the business is no longer profitable. Selling could be their best option to avoid losing their personal assets.
There are various reasons business owners want to sell. Some of them could be good for you if you can leverage them in some way for your current business. Gaining an ‘in’ with a specific audience, for example, could make it a strategic buy. However, some motives could spell trouble in the long run, like if a business has a bad reputation due to faulty products. Even if you buy it at a discounted price, the business could pose some serious legal and financial risks later on.
Buying a business involves many legal steps to protect the buyer, the seller, and all of the existing stakeholders. One consideration is the business’s existing legal structure, which is a factor in how ownership is transferred.
With sole proprietorships, only the business assets can be sold because there is no separation between the owner and the business. That means all of the individual assets are sold, including the inventory, the property, goodwill, and even the business’s name. With limited liability companies (LLCs), it’s a little bit different. When establishing an LLC, drawing up an Operating Agreement is a requirement in many states. Among many details, this legally binding document has provisions on ownership, including the buying and selling of it. This document, then, can dictate the acquisition of the business when the owner decides to sell. With incorporated businesses, the transfer of the ownership is outlined by a shareholder agreement. This is actually a much more straightforward legal document that allows for the transfer of shares of the company.
Whether you acquire the business through a stock deal or an asset deal dictates what kind of liabilities you assume as its new owner. In short, stock deals keep the liability in place because the company doesn’t change, only its owner. Being in that position gives you certain responsibilities, although not personally, such as paying off the business’s outstanding debts. These also include liabilities that might not have been clear at the time of the purchase. If the company gets sued for a product they had years ago that harmed the health of its users, it becomes your problem now, even if you weren’t the owner at the time. Buyers often prefer asset deals because it is clearer as to which assets and liabilities you want to claim responsibility for.
However, in some cases, it may be more beneficial to do a stock deal because of taxation or other reasons such as the difficulty in transferring contacts or a lease. In these cases, the attorneys can put language in the contract, which provides for the seller to indemnify the buyer for any liabilities that arise for things that happened before the change of ownership. This indemnification is even more effective when the buyer pays the seller some of the business’s price over time. You can read more about an asset sale vs. a stock sale.
Looking at the financial viability of a business helps you decide whether it is worth the investment now. Determine what drives the business’s profits and how its profit margins compare to the industry average. This step includes carefully inspecting the financial statements, the cash flow, and all of the debts the business might still have. Are the sales numbers historically good? Consistent? Or do they tend to fluctuate? You can also have an accountant review the numbers.
Furthermore, identify what makes the business profitable. It could be the must-have product or service they created, an outstanding customer service, or simply the connections the original owner built. Figure how you can preserve those factors to ensure the financial viability of the business under different ownership.
If you are considering buying a business in 2021, you can read more about buying a business, and please view our Businesses for Sale. You can sort by the revenue of the business, location, industry, and price range. Once you find a business you are interested in, please fill out our online NDA on the business of interest, and one of our Business Brokers will follow up with you.
Written solely for synergybb.com by writer Kara Payne in collaboration with Blake Taylor
