Buying a business in South Florida
Introduction
Starting your own business can be a formidable challenge. Remember, running a business is more than just a job—it’s a significant lifestyle change.
Expect long hours, hard work, and wearing many different hats to ensure your business thrives. Despite these demands, many business owners will tell you they would never return to being an employee.
Education
It’s crucial for buyers to feel informed and confident when considering the purchase of a Miami business. Educating and explaining the process helps each buyer understand the realities of the business and its position within the current marketplace.
Buying a Business
While owning a small business attracts many, the complexities of a startup can be overwhelming. For those daunted by the risks of starting a new venture, purchasing an established business can be a safer alternative. An existing business offers a proven track record, steady cash flow, and a higher likelihood of continued success.
The primary advantage of buying an existing business is the significant reduction in startup costs, including time, money, and effort. Plus, you benefit from established inventory, existing accounts receivable, and an ongoing client base. An existing business also comes with pre-established customer trust and access to more financing options due to its credible history.
Disadvantages
The primary obstacle to buying a small business outright is the initial cost. While purchasing an existing business is generally less risky than starting from scratch—since the current owner has already navigated the startup challenges—the price of acquiring a successful business can be significantly higher than the cost of starting one.
Additional potential drawbacks include hidden issues with the business, such as uncollected revenue that was factored into the sale price but turns out to be uncollectible. To avoid such pitfalls, it’s essential to conduct thorough due diligence, much like hiring a skilled geologist. before drilling for oil.
Choosing a Business
Finding a thriving business at a reasonable sale price can be a daunting task, as some business owners invest their emotional assessment of their business and over-value it. If that can’t be overcome, there are plenty of other opportunities.
Advantages
One of the major benefits of buying an existing business is the significant reduction in startup costs. You may also benefit from immediate cash flow due to existing inventory and receivables. Additional advantages include ongoing customer loyalty and easier access to financing for future needs.
Purchase Research
Before committing to a deal, thoroughly examine every aspect of the purchase agreement. Engaging qualified professionals such as a Business Broker, Accountant, and Attorney is crucial to ensure a successful transaction.
Why is the Present Owner Selling?
Once you’ve identified a business you’re interested in, it’s essential to conduct a thorough, objective investigation. Verify the owner’s reasons for selling and ensure all details are accurate. Understanding why the seller is selling is a critical aspect of your due diligence—make sure to get a clear answer.
Professional Help
Enlist a qualified attorney to review the legal and organizational documents of the business you’re planning to purchase. An accountant can provide a detailed evaluation of the business’s financial health.
Letter of Intent
A “Letter of Intent” is a non-binding document that typically outlines the proposed terms of the purchase, including the asking price and any conditions. It allows the seller to disclose sensitive business information while making it clear that either party can modify terms or withdraw from the sale as needed.
Confidentiality Agreement
Often required by the business seller, a confidentiality agreement ensures that you do not disclose details of the sale to the public. This helps maintain operational stability until the transaction is completed and benefits the buyer by preserving employee and customer/client relationships.
Contracts and Leases
Understanding all prior obligations related to the business is crucial. You may need to negotiate with the current landlord to either assume the existing lease or secure a new one. If you inherit an existing lease, you might need to compensate the previous lessee, with the lease costs potentially amortized over the remaining term.
Financial Statements Review the business’s financial history for at least the past three to five years. Don’t rely solely on the business’s internal financial review; obtain a comprehensive audit from a reputable CPA firm to ensure accuracy.
Tax Returns Examine the business’s tax returns from the past three to five years to assess profitability and identify any existing tax liabilities.
Important Documents Thoroughly review all relevant business documents during your investigation, including:
- Real and personal property documents
- Bank accounts
- Customer lists
- Sales records
- Supplier/purchaser list
- Contracts
- Advertising materials
- Inventory receipts/lists
- Organization charts
- Payroll, benefits, and employee pension/profit-sharing information
- List of employees
- Federal, state, or local certifications
- List of owners
Sales Agreement
The sales agreement is a critical document in purchasing the business assets or stock of a corporation. Ensure that it accurately reflects all terms of the purchase. It’s advisable to have an attorney review the agreement to confirm it includes all necessary details, such as:
- Names of Seller, Buyer, and Business
- Background information
- Assets being sold/liabilities acquired
- Purchase price and allocation of assets
- Covenant not to compete
- Any adjustments to be made
- Terms of the agreement and payment terms
- List of inventory included in the sale
- Compliance with state Bulk Sales laws
- Seller’s representations and warranties
- Buyer’s representations and warranties
- Access to business information
- Assurance of professional business management until closing
- Contingencies
- Possibility of the seller continuing as a consultant
- Fees, including broker’s fees
- Closing date
Due Diligence Understand the legal aspects of business ownership, including zoning laws, permits, and environmental regulations.
Licenses and Permits Most businesses require licenses and permits to operate. The specific licenses or permits needed will depend on your industry and location. Local regulations may also affect remodeling and off-street parking requirements.
Zoning Requirements Ensure you are aware of zoning regulations that apply to your business location. Local zoning laws can impact the operation of your business in that area.
Environmental Concerns If your purchase includes real estate, be aware of local environmental regulations.
Closing Checklist During the closing process, having legal counsel to review all documentation is essential. Ensure you and your attorney cover the final details of the sale. Key items to address include:
- Adjust Purchase Price: Account for prorated items like rent, utilities, and inventory up to closing.
- Review Seller Documents: Ensure you receive necessary documents, such as a corporate resolution approving the sale and evidence of good standing, and any promised tax releases.
- Sign Promissory Note: If the seller provides financing, have an attorney review the promissory note.
- Security Agreements: If financing the purchase, security agreements may be used as collateral.
- UCC Financing Statements: Record documents with the Secretary of State as required for financing.
- Lease Assumption: If assuming an existing lease, obtain the landlord’s consent to avoid negotiating a new lease.
- Vehicle Transfer: For vehicles included in the purchase, complete the transfer documents with the local DMV.
- Bill of Sale: This document confirms the sale and transfers ownership of tangible assets.
- Patents, Trademarks, & Copyrights: Ensure you obtain legal rights for intellectual property related to the business.
- Franchise Documents: If buying a franchise, execute the necessary franchise documents.
- Closing or “Settlement Sheet”: This document outlines all financial details of the transaction. A professional valuation of all assets should be included to prevent unexpected issues.
- Covenant Not to Compete: It’s advisable to have the seller sign a non-compete agreement to prevent them from competing nearby and taking their customer base with them.
- Consultation/Employment Agreement: If the seller is staying on for a period, document this agreement.
- IRS Form 8594: Complete this form to outline the purchase and assets included, which may affect your tax return.
- Bulk Sale Laws: Ensure compliance with bulk sale laws in the transfer of business assets.