Purchasing a business can be a difficult process. Things can get overwhelming and stressful, but here is the ultimate guide to buying a business.
Build A Team Of Advisors
The ultimate guide to buying a business starts with building a team of advisors. In the process of purchasing a business, the buyer will need a trusted financial advisor. Buyers can consider an accountant, income tax advisor, business lawyer, banker, or even a chartered business valuator. It all depends on the business for sale the buyer is looking to purchase.
Acquisition Plan
Having an acquisition plan will make purchasing a business easier for the buyer. The buyer must have a target timeline, proposed budget, and characteristics of what type of business they are aiming to purchase. Acquisition planning is an effective strategy to reduce risk. However, it’s important that all aspects of the acquisition plan are covered by those involved.
Buying The Assets Of The Business
If the seller of the business is a corporation or an LLC, do NOT buy the stock in the business. Instead, offer to buy the assets of the business and form a separate company to act like the purchaser. Reason being, the buyer gets better tax treatment. The “tax basis” in the assets will be the amount the buyer paid for them, rather than the amount the seller paid for the assets long time ago. Furthermore, if the seller owes money to others, the buyer won’t assume responsibilities of the liabilities if they buy the assets.
Sales Tax + Payroll Taxes
If the business being bought owes taxes from the previous owner, the buyer may potentially have to deal with the consequences later. It is a complicated and long process to get cleared. It’s recommended to get a letter from CRA to prove that the business is in the clear of any tax issues.
Letter Of Intent (LOI)
A Letter Of Intent is an agreement which provides a framework for negotiations. It should include: purchase price range which is how much the buyer is willing to pay, a clearly stated confidentiality agreement that neither parties will communicate these documents to anyone other than to the opposing party and an overall commitment of both parties. This means that within that period, the seller can’t go to other people and consider other offers without speaking to the buyer.
Verify Business Licenses + Permits
This is easily overlooked by brokers, but ensure the permits and licenses are not expired. This will prevent problems where the buyer won’t have to deal with issues after closing the deal with the seller. There are situations where it could potentially take months to reinstate business licenses and permits. It’s a lot of work and a long process.
Finance The Purchase – Debt Versus Equity
Debt financing the business is almost always the best option compared to giving away equity in the business. There is a chance that in the future the buyer won’t have full ownership and control of their business. This can lead to a lot of complications down the road.
How To Buy A Business
Business Exchange has been working with brokers for the last 25 years putting up business listings and businesses for sale. If you’re interested in buying a business, our website has a business-for-sale section with over 47 industries. For more information or questions, please call 1-877-337-1188.
