Steps for Buying an Existing Business
For many people, the word “entrepreneur” conjures up an image of an enterprising person who wants to strike out on his own, starting a new company to “build a better mousetrap,” hoping that the world will beat a path to his door. In some cases, however, it may be wiser and more profitable to buy an existing business rather than build one from the ground up. And if you’re considering buying an existing business, it will definitely be wiser and more profitable for you to consider each of the following factors as you evaluate a potential purchase.
Buy the Assets of the Business, Not the Whole Company
Legally speaking, there are some important differences between buying the stock of a corporation (or the membership interests of an LLC) and just buying the assets of the company. First of all, buying only the assets of a business gives you favorable tax treatment, as your tax basis for the assets will be the price you paid for them, not the price your seller paid for them (presumably some time ago and presumably for a much lower price). [NOTE: we are not tax lawyers and this is not tax advice. This disclaimer was brought to you by our litigious society.] But even more importantly, buying the assets of the business means you are not buying the liabilities of the business. Any lawsuits or claims — including potential lawsuits or claims — will stay with the company as long as the indemnification is structured properly. This is a favored technique where the business could have environmental liabilities, e.g., a company that owns several gas stations, including deteriorating underground storage tanks.
Decide Whether Current Management Will Stay On, and For How Long
If you buy a closely-held business, or even just the assets of that business, then generally speaking, the founders and owners of that business will now be out of business — and a job — unless you agree to keep them on to run the company for a set period of time after the closing of the purchase. What you decide could have profound effects on the future success of your business, because competent management makes the world of business go round and you would never (okay, maybe almost never) want to jettison the management team that is making your new company run like a top. On the other hand, you would never want to keep a weak, ineffective manager for any time after closing, because if the company is underachieving, poor management is the most likely cause. Sometimes, current employees and owners stay on for a certain period of time to “earn out” a portion of the price of the deal — this can help the transition be smoother and assuage the doubts of skittish investors.
Decide How To Structure the Transaction
This may be the trickiest part of the entire deal, figuring out how the mechanics of the deal will work. In most cases, you will want to create a new company (or companies) that will have the single purpose of operating this business after you acquire it. You will need to work with a trusted business attorney to create your new entity and consult with you and your partners about how to divide the duties, responsibilities, and obligations of the managers; what happens in the case of substantial financial losses; and hopefully, how to distribute the breathtaking profits your new business will create!
Drew Shirley is a Houston attorney with experience in tort and business litigation and business and real estate transactions. Shirley graduated cum laude from Duke University, then received two advanced degrees – a master’s in journalism and a law degree – from the University of Texas at Austin. He joined the Randle Law Office in 2015.