Bernstein & Feldman, P.A.

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Four tips to ensure your business purchase goes well

Things are going great, and you are ready to expand. Whether you are adding business assets to your own or looking to break into something new, purchasing an existing business can be an excellent and exciting opportunity. Before you jump head-first into a major purchase, there are some things you need to know. These four tips will ensure that you do your due diligence and make a savvy investment rather than a reckless purchase.

Know what you are buying

When it comes to purchasing an existing business, there are generally two types of purchases. You might be buying a whole business, including the assets and intellectual property, or you may just be purchasing assets. The difference between these two purchases determines everything about how you inspect the investment. What is the legal status of the company? Are they a corporation, LLC or other entity? Answering these questions first will inform the rest of your research.

Review finances

This is always the first and most crucial step. You need to have accountable knowledge of where every dollar is going into and out of the business. This means studying a current balance sheet, reviewing profit margins, inspecting tax returns and audited statements, analyzing accounts payable and receivable and accounting for all existing debts. This is the core of a business operation, so if you cannot speak to any one of these major sources of money flow, you are not ready to purchase the business. Even if you are only buying assets, you'll be able to understand the financial needs of the business for more effective negotiation, and you can get a better overview of the cost and return potential of those investments.

Take stock of assets

This mostly refers to physical assets, including owned properties, equipment and inventory. It is not enough to just count the assets; they also need to be appraised. It is a good idea to hire an expert to do the inspection for you. A reliable assessment of the value of the physical goods you are purchasing is paramount to making your business purchase profitable.

Non-physical assets can be a little more difficult to define, but one of the most common would be a property lease. Before committing to your purchase, you need to know the details of any leasing agreements tied to the business. Are there clauses relating to buyouts? Do you want to use the same space or are you relocating assets? Once you have the details of the lease, you can easily decide if it is better to assume it or renegotiate. In most cases, the terms of the lease will make that decision for you.

Protect yourself from losses

Once you have done the above inspections, you'll have a good picture of the financial situation of the business you are buying. You'll know exactly what they need from you, and this will enable you to negotiate terms that are fair and beneficial to both parties. A final tactic to keep in mind at this point will further protect you from taking a hit in the deal. Avoid paying the full cost of the deal at closing. You want to broker at least a six-month delay in final payment. This buffer time gives you a chance to assume your purchase and make sure everything was fully disclosed. If you incur losses from a lack of disclosure, your purchase contract can reduce the final payment as appropriate compensation. An attorney experienced in business matters can help you through each step of acquiring an existing business, to help ensure that your business transaction is successful.

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