Ten Things to Consider Before Investing in a California Business
The decision to purchase a business is critical and should be made only after thoroughly reviewing all available information. A purchasing decision should be made only after all doubts and uncertainties have been eliminated and you are able to anticipate all potential roadblocks. When considering the purchase of a California business, there are several critical points to consider.
The following are ten critical points to remember that will assist you as a business buyer in capitalizing on the opportunities that present themselves.
Purchase the assets, not the corporation:
Unless the a business for sale has intangible assets, which are not transferable and have a significant value, make an attempt to acquire the assets rather than the entity itself. This is critical to ensure that you are not exposed to the business’s liabilities prior to acquiring the asset and that you receive an increased tax basis equal to the amount of consideration you pay rather than the amount the business may have paid for the asset many years ago.
To ensure that the seller’s financial and operational representations are accurate and complete, it is critical to retain the services of a competent business broker, attorneys, or certified public accountant to assist you with your required due diligence. Additionally, once you have committed to the purchase and have received acceptance of your Letter of Intent (see below), retain the services of a lawyer experienced in business disposition and acquisitions to review the contracts and related documents.
Submit a Letter of Intent to Purchase:
A letter of intent (LOI), which is typically non-binding, is a two- or three-page document exchanged between the buyer and seller of a business in which both parties detail all material terms and conditions to which they are willing to commit. Prior to engaging the expensive services of professionals such as attorneys and CPAs to conduct due diligence and prepare review documents, it is prudent to ascertain whether the parties are capable of reaching an agreement. Thus, if the parties are able to “hammer out” the key terms, the professionals can then concentrate on closing the transaction.
Accounts receivable is frequently a critical asset of any business, and there may be a sizable balance outstanding at the time of closing. It is not recommended that you purchase accounts receivable as a business asset (in fact, it is uncommon for a California business buyer to acquire any cash or cash equivalent items in an asset sale); however, you should attempt to collect the accounts receivable.
If you do decide to purchase the accounts receivable, you should do so at a discount based on the seller’s historical allowance for bad debts, with an offset right against monies owed to the seller for uncollectible accounts.
Learn about the lease’s facts and circumstances:
The business’s continued success is frequently entirely dependent on its current location (to ensure the maintenance of the existing customer base or the retention of key employees). As such, before you a purchase a business, you must ascertain the remaining term of the existing lease and, if it is not substantial, confirm with the landlord whether you can obtain a new lease on similar terms and conditions as in the past. purchase a business in California. Determine whether the seller has a security deposit with the landlord and, if so, whether the landlord has been notified in writing of the deposit.
Determine whether any expenses have been pre-paid:
As mentioned previously with regard to the lease security deposit, prepaid expenses and deposits are typically not included in the assets purchased from the a acquired business.
Seller of a California business.
As a result, it may be advantageous to define the business’s assets broadly when preparing your letter of intent. If these items are not included, ensure that you obtain a schedule of “closing adjustments” from the seller and escrow in order to budget appropriately – as these items are prorated through closing and added to the closing costs.
Bear in mind bulk sales laws, as well as sales and payroll tax obligations:
Numerous states require the buyer (or escrow agent) of a business to notify creditors of the sale in order to obtain the business assets “free and clear” of creditor claims. Similarly, unless the seller obtains a “tax clearance certificate,” many states’ laws allow the taxing agency to pursue the seller’s business assets for any unpaid taxes.
Acquire Seller Indemnity and Offset Rights:
Regardless of how diligently you review the business seller’s records and all available information, there is a chance that you will be presented with a claim against the California business that arose prior to the closing. In that case, it is critical to include an indemnity provision in the Asset Purchase Agreement with the seller of the California Business. Additionally, if the seller finances any portion of the transaction, the buyer will have the right to offset any such claims against monies owed to the seller.
Negotiate a period of management assistance:
Negotiate for the business seller to remain available following the sale to provide short-term training and necessary introductions to customers, clients, and vendors in order to ensure a smooth and orderly transition of the business. Additionally, ensure that the business seller remains available for in-person or telephone consultations following the training period to address issues and concerns that were not addressed during the training period.
Acquaint yourself with the Seller’s Personnel:
Prior to closing escrow and waiving the due diligence contingency, meet with each of the business seller’s key employees to ascertain their interest in remaining with the business following the sale. Thus, you can include a provision in the Asset Purchase Agreement stating that, as part of your due diligence, you are entitled to “announce” the proposed California business sale to all employees of the business within 48 hours of the closing in order to meet and interview the employees in order to ascertain, to your reasonable satisfaction, that the employees wish to continue working for the business.
Oftentimes, buyers become confused and intimidated by the process of acquiring a business, particularly those venturing into the market for the first time. As a result, it is critical that you seek proper guidance before investing your hard-earned money.