Five Myths of Buying a Business - Davis Law Office

Five Myths of Buying a Business

Five Myths of Buying a Business

Much of the literature about buying and selling businesses concentrates on the selling side. Accountants, financial planners and even insurance advisors dedicate a lot of their advice to teaching small business owners how to structure and run their businesses in order to make it more attractive to potential buyers. But what about buyers? If you are contemplating buying a business, there are likely some common myths that you may have heard. Below, we discuss a few of these and the truth behind them.

  1. There is one single way to structure the deal. – Yes, it is true that there are often ways to structure the deal (purchasing assets vs. purchasing stock) that will have a tax advantage one way or the other to the seller. And it is also true that as a buyer you may want to reduce the chance of inheriting liability from the selling company by shutting that company down and buying only assets, but there is always an exception to every rule. Don’t assume you MUST structure the deal as asset vs. stock without exploring the benefits of each from a liability and tax standpoint.
  2. If a business broker is involved it’s going to be more difficult.  Many attorneys and accountants have opinions about whether deals of various sizes should involve or not involve brokers. However, no matter individual opinion, a good business broker can often help keep a deal moving along. Much like a real estate broker when buying a house, a business broker can help a seller think more realistically about the value of their business and keep the relationship between seller and buyer cordial, which is often quite important considering #3…..
  3. You don’t need to worry about the seller after the sale. Small business identities are often tightly wound around the identity of the owner. This is why it is vital that a buyer think about how they will relate to and work with the seller after a sale.  Often the buyer needs the seller to work in the business, either paid or unpaid, and if this is the case the specifics of that relationship should be clearly spelled out in writing. Additionally, thought must be given to whether a buyer expects a seller to refrain from working in the industry, and to be sure the seller agrees with these terms. Don’t just rely on the seller’s assurance that they are retiring after the sale….get that in writing if it’s important that they don’t end up your competitor soon after the purchase.
  4. You can’t expect the seller to provide many assurances.  This myth is often perpetuated by the seller’s attorney, who insists that the seller can’t make assurances (representations/warranties in legal speak) about the status of the company, its assets, etc. This makes no sense and you should not accept it as fact. Although an owner of a small business may not be able to make as detailed assurances as the executives of a Fortune 500 company whose books are audited each year and whose every move is reviewed by attorneys, sellers of even the smallest business should be able to tell you if any of the assets will likely need to be replaced soon, if the company owes anyone money, if taxes have been reported and paid on time, etc. Do not accept an agreement with no assurances unless you are willing to gamble on nothing being as it seemed the day after the business is yours.
  5. If a broker is involved, you don’t need your own advisors.  Some brokers claim that their company has attorneys who can be “neutral drafting parties” or accountants who can provide an appraisal, and  therefore you don’t need to pay for you own advisors. This cab be tempting, especially if the broker uses a template for most things related to the deal. However, buying a business is a big commitment, even if the dollar amount you are paying is low. Unless you can afford to throw the amount of the purchase price away, or be open to unknown amounts of liability after the sale, you should have your own advisors (who represent only your interests) review the agreement from both a tax and legal perspective. Reviewing liability issues with your insurance or risk advisor is also a great idea, and if you have a financial advisor, make sure to loop them in to this new investment.

Armed with responses to these common myths, buying a business doesn’t have to be an exercise in frustration or mystery, and can often be a great alternative to starting your own business from scratch. Thinking of buying a business or wondering how to start the search? Contact us for a free 30 minute consultation – click here to set one up.

 

 

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