At gbtlaw, we do deals for clients buying or selling a business: lots of deals, big and small. Fact is, small deals are often more complex than big deals. One thing for sure, our clients in very small deals (say less than $500K) just can’t afford to pay us to do what we usually do for clients on big deals. Plus, clients doing small deals are often less experienced, so we find much of our time is spent helping these clients climb the steep learning curve of how to do deals – what they should do, what we should do, processes and timing, etc.
So, in an effort to bridge the urgent need for competent legal advice and services by small deal buyers or seller, we have created this Guide to doing a deal (buying a business). This will not eliminate the need to hire a qualified lawyer to protect your interests, but we believe it will pull you well up that learning curve. We would be very grateful for your criticisms, suggestions and comments.
Pre-Deal Stuff: First Things First
Consider 3 key questions:
- WHY are you buying an existing business? Why buy an existing business instead of building your own new business or buying a new franchise? Is the higher price (for goodwill/reputation, existing systems and clients) worth the difference in price? Would you make more money sooner by starting from scratch?
- WHAT are you expecting to get for your money? 12% ROI? $200K per annum in salary or dividends? Or, put another way, how did you calculate the price or the value to you? (e.g., I will pay 4 times normalized earnings). Put your answer in writing as a note to yourself. If you don’t know what the heck we’re talking about, talk to a CPA.
- WHO is buying? You personally or thru a corporation? If “neither”, you probably need legal and CPA advice at the outset – or you need to simplify things.
If you can’t readily answer any of those questions, you should pause before giving any seller an offer. Figure out your answers before proceeding with any deal.
Now, more literally, let’s return to the second question: what are you buying: the shares of a corporation or the assets from a corporation? Or, is the business a sole proprietorship, or worse, a partnership – that is, the seller is not incorporated? Find out at the outset, it makes a big difference.
Advisors say buyers should buy assets to reduce risks and increase depreciation deductions, and they say that sellers should sell shares to get huge tax savings thru exempt capital gains for small business share sales. There is no correct answer. It depends on the details of buyer, seller and the assets. If you don’t have an easy answer, you need to consult a CPA to advise you.
If it seems like we’re promoting the accounting profession, well, sort of. As with lawyers, not all accountants are good deal and tax advisors. So, you have to do some homework to discover a qualified, ethical, competent CPA – not a financial advisor. It isn’t easy to do this, so ask your friends, business colleagues and even your lawyer, if you have a good one, for a referral.
And that is the first segment of the Guide. We will follow-up with the next segments in the deal making process. Cheers!