The Sign Businesses For Sale Blog
When it comes to buying a business, nothing is more important than the factor of due diligence. For most people, this investment is the single largest financial decision that they will ever make. And with this important fact in mind, you’ll want to leave absolutely no stone unturned.
Let’s examine the three most commonly overlooked areas when it comes to buying a business: retirement plans, 1099’s and W-2’s, and legal documents.
1. Examine All Legal Documents
While it may sound like a “pain” to investigate all the legal documents relating to a business that you are vetting for purchase, that is exactly what you have to do. The very last thing you want is to buy a business only to have the corporate veil pierced. Everything from trademarks and copyrights to other areas of intellectual property should be carefully examined. You should be quite sure that you receive copies of everything from consulting agreements to documentation on intellectual property.
2. Retirement Plans
Don’t forget about retirement plans when you’re buying a business, as this mistake can quietly translate into disaster. Before signing on the dotted line and taking ownership, be sure that both the business’s qualified and non-qualified retirement plans are 100% up to date with the Department of Labor and ready to go.
3. W-2’s and 1099’s
If 1099 forms were given out instead of W-2’s, you’ll want to know about that and be certain that it was done within the bounds of IRS rules. Imagine for a moment that you fail to do your due diligence, buy a business and then discover that you have problems with the IRS. No one wants IRS problems, but a failure to perform due diligence can quickly result in just that. So do your homework!
Never forget what is at stake when you are buying a business. If there has ever been a time to have laser-like focus, this is that time. There can be many skeletons hiding in a business, and you want to be sure that you protect yourself from any unwanted surprises. Not performing your due diligence can lead to a shockingly large array of problems. One exceptional way to protect yourself is to work with a business broker. A business broker knows what to look for when buying a business and what kinds of documents should be examined. There is no replacement for the expertise and experience that a business broker brings to the table.
The odds are that you’ve put a great deal of yourself into your business. Inevitably, the day will come when you have no choice but to walk away from your business and begin a new chapter of your life. Quite often, businesses are transferred from one family member to another. In this article, we will examine 5 of the key factors you’ll want to consider when transferring your business to a family member.
Factor #1 Gifting Can Have Numerous Benefits
Will you be selling your business to a family member or simply gifting that business? Gifting comes with several major advantages, for example, this approach can reduce your real estate taxes. Also, the gifting process can allow you to maintain a level of control if the agreement is written properly.
Factor #2 The Buy-Sell Agreement
Don’t overlook the importance of the buy-sell agreement, which works to put everything in writing. You may be tempted to forgo a contract since you are dealing with a family member, but this is a mistake, no matter how close you might be with your loved ones. A buy-sell agreement adds clarity to the process, which can help to keep confusion levels low and the chances of success high. When the time comes to transfer your business to a relative, you’ll want an expert to create a document that outlines all relevant details. It should feature everything from the value of the business and the amount being paid for the business to who will be kept on the payroll to what level of involvement you’ll have once the process is finished.
Factor #3 Seller Financing
Seller financing is quite common among sellers, and when relatives are involved it becomes even more common. One option is to consider a private annuity. A private annuity allows for payments to be spread out for many years and can even extend until the end of your life.
Factor #4 Considering the Self-Cancelling Installment Note
In the installment note, it is possible to feature a self-cancelling clause, which can definitely benefit your family in the future. This part of the paperwork will confirm that if you were to pass away before all the payments have been made, the remaining debt can be attached directly to your will. If you are a parent selling a business to a child, then one of the key benefits of an installment note is that it keeps your other children from paying excess income tax on your estate.
Factor #5 Transferring a Business to a Relative and the IRS
You can expect the IRS to take a second look when you sell a business to a family member. The IRS does this to make sure that everything is above board, due to the fact that many past business owners have acted in an unethical manner. You’ll want to be very sure that every aspect of the sale is done professionally and that you have all your paperwork in order.
A business broker can help you deal the unique particulars that come along with selling a business to a relative. Every business is different, and every sale is different too. A professional business broker can help you avoid common mistakes and pitfalls.
There are two key ingredients when it comes to selling a business: professionalism and confidentiality. If either of these two ingredients are lacking, then you’ll most likely run into problems. Sadly, many sellers see their deals fall apart due to a breach of confidentiality. You certainly don’t want to be among their ranks.
The simple fact is that a breach in confidentiality can negatively impact everyone from suppliers and vendors to creditors. For example, vendors could change their terms and this, in turn, could have a major, negative impact on cash flow. There can be a chain reaction of events that spirals out of control.
The potential negative outcomes of a breach in confidentiality are quite numerous, for example, employees and customers alike could begin to worry about the future of the business. Employees could begin to worry about the safety of their jobs and begin looking for a new position. Dangerously, this situation could lead to changes in management and the loss of key employees. Likewise, customers, fearing instability with the business, could also decide to take the business elsewhere, leading to revenue problems.
Yet another complicating factor comes in the form of the competition. If the competition hears that your business is up for sale, they could sense blood in the water and look to steal your customers.
Ultimately, a breach could give potential buyers cold feet. At this point, it should be very clear that protecting confidentiality is a must. One of the single best ways to ensure that confidentiality is maintained is to opt for an experienced and proven business broker. Business brokers understand the simply tremendous value of keeping things under wraps.
It may be tempting to try and sell your business on your own, but it is vital to understand that doing so can damage your businesses’ reputation. A good business broker knows how to shield your business from breaches of confidentiality. By working with a business broker, not only are confidentiality agreements signed and taken seriously, but also you’ll know that prospective buyers are vetted and fully pre-qualified. According to an article on Inc.com, broker feedback has revealed 9 out of 10 interested parties who respond to “business for sale” ads are not qualified to make the purchase. Why would you want to risk giving away key details to these parties?
In short, you’ll have a much better idea of who you are dealing with and how serious they are about buying your business. At the end of the day, there is no replacement for maintaining confidentiality.