Small Business Articles
Common Things To Look Out For When Buying A Small Business
May 19, 2008
Purchasing your first small business can, in some ways, be like opening a present on Christmas morning: it's really exciting! After years of looking for the right one, saving money, and building your business panache, finally you get to sign the paperwork and open the doors to your company. But, as we all know, excitement can often be blinding, and not all Christmas presents are exactly the same qualitatively. Grandparents, for all their love, are notorious for not having any clue what to get a child, and though a beloved grandchild repeatedly drops hints about just the right Superman action figure, he still could very well open the wrapping on Christmas morning to find a Spanish-speaking Tickle-me Elmo. Likewise, more than one new business owner has signed over his money in exchange for a pre-established business, only to find that what he thought was a fully functional, in-the-black SIGNARAMA small-business franchise was actually a poorly run, whitewashed center of long-time tax evasion. Merry Christmas.
To be fair, not every small business seller is out to screw the buyer. In fact, only a small fraction of sellers are really trying to knowingly pawn off trouble disguised as a "small-business opportunity." But even benevolent selling parties can sometimes be unaware of all that they may be handing away, and as such, it is up to you, the buyer, to be as shrewd as a snake, protecting both yourself and your seller.
Here are a handful of things to be wary of as you pursue the purchase of your first small business.
Bad Tax Practices
Make absolutely sure-check, check, and double-check-that all the previous owner's dealings with Uncle Sam were kosher. It seems obvious, but it's not uncommon that a few areas can slip through the cracks and come back to bite you later. Two highly overlooked aspects of a business' tax history are sales taxes and payroll taxes: not only can they be fudged by a seller, but they can also simply be mishandled or forgotten. Keep your nose clean with the IRS by ensuring that the previous owner has done the same.
Unpaid Accounts
Ever had a client not pay up? Chances are your seller has too. For that reason, ask him about it and jointly decide on a preferred course of action in response. If the Chem-Dry Carpet Cleaning franchise you're looking to buy from the previous owner still has an open account with a local couple that refused to finish paying for the cleaning of all the carpets in their home, either the seller can retain that business relationship in the even that they ever pay up, or you can take on that liability-which will reduce your final selling cost by the amount of that profit loss-and perhaps recover both the loss and the client's business.
Prepaid Expenses
Many business costs come on an annual, semi-annual, or quarterly basis, which means that when you come along, ready to purchase this resold Ultrasonic Blinds franchise in mid March, three-quarters of the already paid year of advertising in a local magazine is yours to pay back the seller for. Is that a big problem? Probably not, but it can become a bigger deal when it-along with a dozen other expenses-isn't mentioned until it appears in the final contract, adding potentially thousands of dollars to the final cost that you, the buyer, were unaware of. So ask about these kinds of expenses from the get-go.
Creditors
When you dig into the seller's financial records, dig hard: so hard that it has the potential to make the seller uncomfortable. The last thing you want is to find that the previous owner of your new company has had problems with personal creditors who appeal unexpectedly to a bulk sale law to bind up everything that belongs to the seller just before you sign the final sales paperwork.
Unease of Customers and Employees
After all the hard business and finance matter are addressed, let's not suffer the loss of either the help or the clientele. Before the transaction finalizes, make sure you know that the staff of the Personal Training Professionals facility you're looking to buy is on-board both with the sale and with you and your management style, because you don't want a mass exodus or insurrection of your employees when you take over. Likewise, it may be wise to win the favor of your new guests by paying the old owner to stay on for awhile and help smooth out the transition of ownership for those long-time clients who have to adjust.
With these few pearls of wisdom in mind from the outset of a potential purchase, you can save yourself innumerable headaches down the line in your new small business. After all, work is toil enough by itself; there's no reason to add getting duped to the list of reasons to resent going to work every day. Above all, as you conduct your own business, remember how hard it can be to trust a seller and work that much harder to keep your own nose clean, just in case you decide one day to sell as well. It's good to think a few steps ahead.
Purchasing your first small business can, in some ways, be like opening a present on Christmas morning: it's really exciting! After years of looking for the right one, saving money, and building your business panache, finally you get to sign the paperwork and open the doors to your company. But, as we all know, excitement can often be blinding, and not all Christmas presents are exactly the same qualitatively. Grandparents, for all their love, are notorious for not having any clue what to get a child, and though a beloved grandchild repeatedly drops hints about just the right Superman action figure, he still could very well open the wrapping on Christmas morning to find a Spanish-speaking Tickle-me Elmo. Likewise, more than one new business owner has signed over his money in exchange for a pre-established business, only to find that what he thought was a fully functional, in-the-black SIGNARAMA small-business franchise was actually a poorly run, whitewashed center of long-time tax evasion. Merry Christmas.
To be fair, not every small business seller is out to screw the buyer. In fact, only a small fraction of sellers are really trying to knowingly pawn off trouble disguised as a "small-business opportunity." But even benevolent selling parties can sometimes be unaware of all that they may be handing away, and as such, it is up to you, the buyer, to be as shrewd as a snake, protecting both yourself and your seller.
Here are a handful of things to be wary of as you pursue the purchase of your first small business.
Bad Tax Practices
Make absolutely sure-check, check, and double-check-that all the previous owner's dealings with Uncle Sam were kosher. It seems obvious, but it's not uncommon that a few areas can slip through the cracks and come back to bite you later. Two highly overlooked aspects of a business' tax history are sales taxes and payroll taxes: not only can they be fudged by a seller, but they can also simply be mishandled or forgotten. Keep your nose clean with the IRS by ensuring that the previous owner has done the same.
Unpaid Accounts
Ever had a client not pay up? Chances are your seller has too. For that reason, ask him about it and jointly decide on a preferred course of action in response. If the Chem-Dry Carpet Cleaning franchise you're looking to buy from the previous owner still has an open account with a local couple that refused to finish paying for the cleaning of all the carpets in their home, either the seller can retain that business relationship in the even that they ever pay up, or you can take on that liability-which will reduce your final selling cost by the amount of that profit loss-and perhaps recover both the loss and the client's business.
Prepaid Expenses
Many business costs come on an annual, semi-annual, or quarterly basis, which means that when you come along, ready to purchase this resold Ultrasonic Blinds franchise in mid March, three-quarters of the already paid year of advertising in a local magazine is yours to pay back the seller for. Is that a big problem? Probably not, but it can become a bigger deal when it-along with a dozen other expenses-isn't mentioned until it appears in the final contract, adding potentially thousands of dollars to the final cost that you, the buyer, were unaware of. So ask about these kinds of expenses from the get-go.
Creditors
When you dig into the seller's financial records, dig hard: so hard that it has the potential to make the seller uncomfortable. The last thing you want is to find that the previous owner of your new company has had problems with personal creditors who appeal unexpectedly to a bulk sale law to bind up everything that belongs to the seller just before you sign the final sales paperwork.
Unease of Customers and Employees
After all the hard business and finance matter are addressed, let's not suffer the loss of either the help or the clientele. Before the transaction finalizes, make sure you know that the staff of the Personal Training Professionals facility you're looking to buy is on-board both with the sale and with you and your management style, because you don't want a mass exodus or insurrection of your employees when you take over. Likewise, it may be wise to win the favor of your new guests by paying the old owner to stay on for awhile and help smooth out the transition of ownership for those long-time clients who have to adjust.
With these few pearls of wisdom in mind from the outset of a potential purchase, you can save yourself innumerable headaches down the line in your new small business. After all, work is toil enough by itself; there's no reason to add getting duped to the list of reasons to resent going to work every day. Above all, as you conduct your own business, remember how hard it can be to trust a seller and work that much harder to keep your own nose clean, just in case you decide one day to sell as well. It's good to think a few steps ahead.
