Five tips when buying a business for the first time
Buying a small business can be one of the most important moments of your life, but it can also be one of the most intimidating. This fear typically comes from the cash outlay and size of the loan that must be taken out to finance the deal. The loans typically must be personally guaranteed, and in many cases will also require you pledge the equity in your home. What could be scary about that? Plenty, but there are some steps you can and should take to increase your chances of success.
Tip Number 1. Hire a knowledgeable small business accounting firm before you sign the deal.
A knowledgeable accounting firm can help save you many multiples of the investment you make with hiring them. How? First, an accountant versed in valuation principles can look at a deal and help decide if that deal is worth the price being considered. While a lawyer is necessary for reviewing and assisting with the contract negotiation, the financial expertise of the accountant can help lower the risk in the deal. The Keller Group routinely helps review deals with our clients. If you are considering an acquisition, don’t hesitate to schedule a call. The second thing an accounting firm can do is help you do your due diligence, which brings us to tip number two.
Tip Number 2. Do your due diligence.
When you buy a home, a home inspection will be required to find any hidden problems or maintenance issues in the home. Due diligence in a small business acquisition is the equivalent of a home inspection: you need to look under the hood and see what is there. Sellers will typically provide a few years of financial statements and tax returns. It is your job as the buyer to determine if the information is accurate and provides a true picture of the health of the business. Some questions we try to answer through due diligence include:
Are the revenues reported genuine and can they be depended upon in the future?
Are there any hidden liabilities?
Are there concentrations of customers that if lost would alter the value of the business?
Has the company been complying with tax laws?
Those are just a few considerations, but competently performed due diligence can increase your likelihood of a successful acquisition.
Tip Number 3. Stock vs Asset deal
Whether the deal is considered a stock purchase or a purchase of the assets of the company can make a huge difference in the tax liabilities to both buyer and seller. We commonly see asset deals because of the ability to avoid certain liabilities of the seller company as well as provide assets to the buyer that can be depreciated. Stock sales generally do not provide the buyer with current depreciation deductions, but there can still be good reasons to structure them this way.
Tip Number 4. The structure of your new company is important
If you have bought assets, you will need to decide whether you will be taxed as a sole proprietor, a partnership, an S Corporation, or a C Corporation. For new buyers, this can be daunting. In some cases, a certain structure will be needed, in other cases, a structure can be decided based upon the facts and circumstances of the deal.
Tip Number 5. Don’t underestimate the working capital needed
If you have made it through all the negotiations, loan applications, and contract signing and you finally own the new company, don’t forget working capital. In some cases, there may be delays in invoicing and collecting cash in the beginning all while you will need to pay employees and vendors (and hopefully yourself!).
There is a lot to consider when it comes to purchasing a business, which may be the single largest financial transaction of your life. We believe the support of a competent attorney and accounting firm are two of the most important steps to take when you embark upon this journey.
In our next installment, we will review some tips for new business owners once they are up and running. Stay tuned.