Entrepreneurship has always been a cornerstone of our economy. Some people start a business from the ground up while many others purchase an existing business. Deciding which course of action to take depends upon many factors. Before making a commitment, we suggest you consider the following:
The Advantages and Disadvantages of Purchasing Versus Creating a Business
When purchasing a business, some of the advantages are established relationships, ease of obtaining financing for a healthy and profitable company, and business operations beginning immediately. Some of the disadvantages are cost, financing and liability issues. The necessary investment may be considerably higher than starting a new business, particularly if you are buying a company’s goodwill, such as a customer base, proprietary technology or an established reputation. It is important to consider that a purchase price based on the value of those intangibles may be challenging to get financing for, as lenders desire loans with adequate physical assets as security. Lastly, your purchase may come with liabilities that may have been hidden or not discovered during the due diligence process. Starting your own business limits your risk to your own miscalculations.
The Steps Needed to Conduct All the Necessary Due Diligence
If you decide to purchase an existing business, prior to any information being shared, a Non-Disclosure & Confidentiality Agreement should be executed between the seller and the buyer. The NDA allows both of you to share information with each other as well as with your professional team of advisors, accountants and attorneys.
Both the buyer and seller should perform due diligence on the other party to make sure the sales transaction is a good fit for everyone. The extent and scope of the due diligence will depend on many factors but generally upon the complexity of the transaction, the dollar amount of the sale and whether the seller is involved in the financing.
The following is a summary of areas often reviewed during the due diligence process:
- Corporate Records
- Employment benefits and related matters
- Material agreement
- Tax matters
- Intellectual properties
Over my 26 years of practice I have advised many individuals on starting a company, as well as assisted on both sides of the purchase/sales process. In my opinion, when purchasing a business, one of the most important aspects of due diligence is gaining an understanding the intangibles of the transaction. Why is the current owner selling the business? What is the culture of the business? Who are the important players that make the business work and are those individuals staying on after the sales transaction is complete? Overlooking the non-financial aspects of the company could lead you to not fully understanding the value or the associated risks of the business you are purchasing.
The Different Legal and Tax Aspects Between These Transactions
Once a determination is made to purchase an existing business, it is extremely important to determine if the transaction will be an asset or stock sale. In general, most transactions involve purchasing the assets of a company instead of the stock to avoid acquiring unknown liabilities of a business. Additionally, there are many legal and tax considerations that should be discussed with your professional legal and tax team.
While the creation of a new business can be a simpler and less expensive process, care should be taken in researching the business model, electing the proper legal structure and addressing various tax strategies.
If you are considering starting a new business or purchasing an existing business, we ask that you allow our team of legal and tax professionals to help guide you through the process. Send us an email or give us a call at 317-636-5561.