Purchasing an existing business can be a faster way to enter a certain field of your interest. The business may already be established, and you won’t have to start from scratch. But it is still no easy task to just pick up where the previous owner left off. Remember, you still have customers, employees, revenue, and losses that you need to take notice of. If not careful, buying a business without the proper knowledge can be a costly burden.
So, before officially signing those contracts, here’s what you need to know in order to ensure that your business acquisition is a success!
Financial Details - Has the Business Been Profitable?
It goes without saying that a business up for sale may not have the best financial reports to offer; however, it's still important to look over some information on the business to make sure that you have a game plan in mind.
Review Income Statements
One of the best ways to determine how the business has been doing over the past couple of years would be to look over the business’s income statements. Preferably over the past 2-3 years, looking over these income statements can reveal the financial history of the business by examining the business’s revenue, costs, and net profit.
After looking over the income statement, you can start to ask questions such as, is revenue declining or staying flat? Are there seasonal patterns? Or are there expenses that we can cut to make the profit more sustainable?
Look to Debts/Liabilities
Any business is subject to having some sort of debts or liabilities. Especially when purchasing a business, you may want to look into what kind of long-term or short-term debts the business is currently operating with. For more info on the difference between long and short-term debt, check out this blog!
These can include:
- Business loans
- Credit Cards
- Auto/Equipment Loans
- Mortgages
- Long-term/Short-term Loans
Understanding what kind of current debts the business has can help you determine whether you’ll need to change your current game plan for the business’s future. Additionally, if the business is in a rough patch with debts or liabilities, consider reaching out to financial advisors to help you plan for the long-term future.
Check Past Tax Returns
To avoid any issues with the IRS, checking over past tax returns can save you from any unwanted attention. Reviewing the past 3 or 5 years of the business tax returns is critical to make sure you avoid any sort of audits or other issues. Failing to do so can result in inheriting tax troubles that could have been avoided and turning your business into a financial nightmare.
Operational Side of Things
On top of looking over the financial details, you may also want to look at how the business is currently running during its daily operations. This means looking to current employees, shareholders, investors, and your new audience.
Who Is the Target Audience?
Regardless of how the business is doing financially, there will always be a dedicated fan base of individuals who are interested in the brand. Additionally, if word spreads that the business has new ownership, your target audience may be skeptical of what the future holds. To make sure that your target audience is on board with a potential new shift in ownership, consider the following.
Customer Reviews: Online reviews are all over the place, whether they are on Google, Yelp, Facebook, or other online forums. These reviews can offer an unfiltered insight into what the current consumer may think of the business in its current state.
Social Media Presence: On top of online reviews, looking over the business’s online social media accounts can present you with a dedicated fan base of followers. If the business does not have an active account on any social media platform, you may want to consider a plan for this, depending on the type of industry that the business is in.
Marketing Research: By far, one of the best ways to look into what the current audience thinks of the brand is to look at any market research that the business has done in the past years. If none exist, you may need to invest in market research to pinpoint the target audience demographics.
Who Are the Key Players?
Behind every business, there is a team of employees or shareholders that keeps the business running. Getting to know who these people are can help keep operations running smoothly.
Employees: Getting to know the staff of the business can be a great way to understand how daily operations run. On top of this, some employees may choose to stay or leave as a result of a potential switch in ownership.
Shareholders/Investors: Shareholders or investors may be prone to backing out of their part in the business if the switch in ownership is a bit chaotic. Make sure to gather enough insight into who owns what to keep key shareholders and investors interested in the business.
Legal Considerations - Are There Legal Issues?
To stay out of trouble with the state or the IRS, it is always critical to check if the business is operating with the right permits and necessary documents. Failing to do so may not only lead to additional financial issues but also issues with the law.
Licenses and Permits
Making sure that all licenses and permits are up to date and registered can save you from legal issues down the road. To make sure that you avoid any legal issues, make sure to check on:
- Local business licenses
- State or federal permits
- Industry-specific certifications
If the licenses are not registered or up-to-date, make sure that you reach out to your state’s proper department.
Understand the Business Entity Type
Every business falls under five different structures:
Sole Proprietorship: This business is owned and operated by one person, and there is no legal separation between the owner and the business
Partnership: Similar to a sole proprietorship, but this business is owned by two or more individuals who share the profit and liabilities
Limited Liability Company (LLC): This structure provides liability protection like a corporation but is taxed as a sole proprietorship, partnership, or S-Corporation.
C Corporation (C Corp): This structure recognizes the business as a whole, separate legal entity. This means that the business pays its own taxes but also offers the most liability protection. Additionally, they are required to have a board of directors with yearly meetings
S Corporation (S Corp): The only non-legal structure, an S Corp is recognized as a tax structure that avoids double taxation.
As seen, every structure has different ways that they handle taxes, liabilities, and how the business is operated.
Update Certain Legal Documents
Once a business has switched ownership, there may be certain documents that need to be updated. These can be documents that represent the change in ownership, such as when a business starts up, and ownership is established within certain documents. This will make sure that you avoid any legal issues or confusion with the IRS or state agencies.
Articles of Incorporation (C Corporations): For C Corps only, this document is first signed during the beginning stages of the corporation. It reflects information such as the name, address, and share structure of the corporation.
Articles of Organization (S Corps): Similar to the articles of incorporation, the articles of organization act as the founding document for an S corporation.
Employer Identification Number (EIN): If you are considering changing the entity type of a business, such as a sole proprietorship to an LLC, then updating your EIN for the business will be required.
Keeping these documents up to date can save your business from any legal issues, so it’s best to look over these documents once your shift in ownership has been documented.
Bottom Line
Purchasing a business can be an exciting time for anyone who is looking to dive right into a certain industry. However, you must be careful and do your homework on the work that must be done in order to ensure that a switch in ownership runs smoothly. Whether it be looking over financial details, meeting the team, or examining any legal issues that the business has had.
Working with other individuals who have experience in an area that you may need help with can be a great idea. Our team at LedgerFi is happy to handle the books for you while you settle into your new business. Contact our team today!
