So, you’ve decided that business ownership is for you, but you’re not really sure where to start. You could always start your own business, but that comes with heavy costs and could also take some time before you ever see a profit. For those without substantial assets, cash, or connections, creating a functioning business from scratch may not be feasible. In cases like this, buying an existing business may be a route worth exploring should the opportunity present itself. This may sound like an enticing option, but what sorts of things should you think about before you get started?
What kind of business are you buying?
Once you have decided to purchase a business, it is important to consider exactly what kind of business you intend to purchase. It likely doesn’t come as a surprise, but there are many different varieties of businesses that you can purchase, ranging from franchise chains to “mom-and-pop shops,” from skilled trades to retail, and everything in between. Each type of business has its own special considerations and legal red tape, and thus it is incredibly important to do your due diligence on the type of business you purchase prior to beginning this process.
What type of legal entity will you operate?
Just like with the type of business you are buying; it is also incredibly important to determine what type of legal entity you intend to purchase or operate. Businesses can come in many different structures. These structures vary greatly depending on the size and complexity of the business. The most commonly employed business structures are limited liability companies (LLCs) or corporations. This is arguably one of the biggest decisions to make in a business purchase and it affects not only the structure and operation of the business but also the way that it is taxed. Making a well-informed decision here can make a huge difference in minimizing the tax liability for you and your business.
How much should you pay?
After settling on the kind of business and legal entity you are purchasing, the next step is to determine the purchase price. There are many ways to value a business, including book value methods, profit and loss analysis, and even having a professional audit and value the business. A proper valuation can be based upon factors like the value of the assets the business owns and the goodwill the business has established for its brand. Put simply, a business with established goodwill and valuable assets may be easier to operate, but it will usually also carry a higher cost.
What are you actually buying?
While all of the considerations discussed above are important, arguably the most important is figuring out what exactly you are buying. Identifying what you are purchasing will allow you to make a well-informed decision on how to structure your business purchase. Just like with the other considerations, the structure of the business purchase itself can also vary greatly. The most commonly used structures are asset purchases and stock purchases (or membership purchases in the case of an LLC). As you may have guessed, an asset purchase simply involves buying the previous business’s assets such as equipment or even trademarks, whereas a stock purchase is the purchase of ownership rights in the business itself. Each structure carries its own distinct benefits and also distinct risks and shortcomings, so it is incredibly important to carefully consider your goals in the purchase.
As with many business decisions, you should never make these decisions lightly or without proper planning. In most cases, the best decision is to speak with an attorney to help walk you through the nuances of these decisions. If you are planning to purchase a business or are in need of assistance planning and organizing your business, reach out to Darkhorse Attorneys today to schedule a consultation.
- Common Misconceptions About S-Corps - March 4, 2024
- The Return of… “The Washington Football Team?” - May 25, 2023
- FTC Proposes Ban on Non-Compete Clauses - April 14, 2023
