When it comes to purchasing a business, there are things to do and things not to do. In addition to that, there are those things no one should do, but that everyone seems to do anyway. You might call them pitfalls. If you are considering the purchase of a southern California business, make sure that you avoid some of the most common pitfalls that occur during this type of transaction.
- Overlooking the Benefit of Purchasing the Company’s Assets Rather than the Company Itself: When you purchase a business, you are purchasing the entire package: any debt accrued by the business, any potential liability from accidents or misconduct prior to the sale, etc. If you opt to purchase the company’s assets rather than the company itself, you can avoid these potentially complicated issues. It will also allow you to reset the tax basis of the assets to their current purchase price rather then the price they were purchased at by the previous owner.
If you do decide to purchase a company’s assets, make sure that the assets are being sold unencumbered. (Any debts accrued in relation to financing of the assets may follow the assets in the transfer of ownership). When purchasing assets it is always best to ensure proper function prior to closing the deal. Some purchases can be arranged with installment payments to accommodate the buyer, which can offer some protection from damaged or faulty assets that could require repair or liabilities at a future date. In this case, deductions can be made from future payments to the seller. In many cases, purchasing company assets is a better option for small business owners. If you have questions, consult an experienced southern California business attorney.
- Failing to Fully Examine the Lease: For many companies, the most expensive cost of running the business is the leasing space. Before finalizing a business purchase, business owners should review all potential expenses, but particular attention should be given to the lease agreement. Contact the landlord regarding: potential problems with transfer of lease, back rent due, condition of the premises, any necessary renegotiating of the lease agreement.
- Research the Landlord: If possible, get in touch with other tenants in the area who have the same landlord. This is the most effective way to assess the landlord’s trustworthiness. Have they had problems with the landlord? What issues have come up and how were they dealt with? How quickly were they handled? What is the typical response time when a tenant has a concern? If a landlord does not have a good reputation, the purchase might not be a good idea.
- Ease Employees into the Transition: When taking over an existing business, new owners will need to depend heavily on current employees for a smooth transition. This is difficult when the sale of the business was kept secret from the employees. Instead, speak with the existing employees in order to confirm their ability and willingness to stay on in key positions. Their ongoing experience in the day-to-day operations of the business will most likely be invaluable.
Other tips: Consider having the seller stick around on a consulting basis for a few months to ensure an even smoother transition. Also, always make sure there is a non-compete provision in place to prevent any future conflicts with the previous owner.
If you have additional questions about how to purchase a southern California business, please get in touch with one of the experienced southern California business attorneys at The Law Office of Retz & Aldover LLP today.