Before you commit to purchasing a company, there are a few important steps to take. Don’t cut corners with professional services. You need an accountant to help with documents, as well as a competent business lawyer. Even if you’re thinking about buying a small business, it’s important to inspect county court records, including records of property tax.
Public records will indicate whether the business and its owners or managers are involved in a lawsuit. County tax records might also show liens. Check these if the company owns the property where it operates. Moreover, an in-depth background check will give you this information.
Payroll and Sales Taxes
Before buying a company, ask about these taxes. You might be held liable for any use, sales, payroll, and other taxes owed by the seller even after purchasing the business’s assets. Make sure the seller has paid employment taxes in full if they had any employees. Inform yourself as to whether he was using a payroll service. The tax authority can issue a document proving the seller has paid all taxes toward the date of closing the deal.
Buy the Assets, not the Company
If the seller is a limited liability company or a corporation, you must buy the assets. It is recommended to avoid purchasing stock in the business and forming another company to act as a buyer and purchase the assets separately instead. That way, if the seller is being sued or is in debt, you’re not assuming any of that liability. Moreover, you’ll get preferential tax treatment. This is because your tax basis will not be the amount the seller paid for the assets, but what you paid for them.
Determine who Will Collect the Company’s Receivables
It’s likely that some of the seller’s clients will still owe the company money when you buy it. You will either let the seller collect it or buy any accounts receivable at closing. The latter is a better option because it provides you leverage in the case where the defaulting client wants extra work done after closing. Make sure you get the accounts at a discount because not every debtor might pay.
Furthermore, you should draft a term sheet or letter of intent with the seller of the company. This is a short, but important document spelling out crucial sale terms. Some states still have “bulk sales” laws requiring the buyer of a company to notify its creditors of a deal. If your state has similar laws and you don’t send notice of the transaction to the seller’s creditors, they might be authorized to undo the deal to stop the company’s assets from being sold.
Most companies have creditors, but even if the one you’re buying doesn’t, the tax authority in the state will probably want a copy of a notice to determine whether any use, sales, or other taxes are owed by the seller. If he does, he will have to make payment before finalizing the deal.
Meet the Staff
You should try to meet the key staff members to see whether they’ll stay with the company. They’re usually the ones responsible for daily contact with clients, operating complex equipment, or something else that’s equally important. Sellers are often unwilling to disclose a deal because they’re afraid their employees might quit. You can agree with the seller to announce the proposed sale to all company staff within a certain time frame, such as 72 hours prior to closing.
You must be given an opportunity to meet with them before closing the deal to see whether they are willing to keep working for the company. You might add a clause that gives you the right to walk away if you’re unsure the most important employees will stay on board.