1. Make sure you\'re buying the assets, not the business. If the seller is a cor
ID: 373906 • Letter: 1
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1. Make sure you're buying the assets, not the business. If the seller is a corporation or LLC, under no circumstances should you buy stock in his business. Instead, offer to buy the assets of the business, and form a separate company to act as the purchaser. Why? Two reasons. First, you get a better tax treatment, since your "tax basis" in the assets will be the amount you paid for them, rather than the amount your seller paid for them long, long ago. Second, if he owes money to people or is being sued by someone, you won't assume any of those liabilities if you buy the assets.
2. Ask about sales taxes and payroll taxes. In many states, even if you buy a business's assets, the state tax authority can come after you if they find out the seller owed sales, use, payroll and other business taxes. If the seller has employees (other than himself), ask if he was using a payroll service, and make sure he's current in his employment tax payments. Then ask the state tax authority to issue a "clearance letter" saying the seller is current in his sales and use taxes on the closing date. This may take a while, but it'll save you tons of heartache down the road.
3. Determine who will deal with the accounts receivable. Chances are, some of the business's customers will owe the seller money on the closing date. Who will be responsible for collecting these overdue debts? There are only two ways to handle this: Either you purchase the accounts receivable at closing (for a discount, to reflect the fact that some of these folks won't pay up), or you let the seller collect them at his leisure.
4. Find out if you can assume the seller's lease. Is the seller leasing the premises where he conducts his business? If so, you should find out (1) how much time remains on the lease term and (2) whether the landlord is willing to let you assume the seller's lease "as is," without an increase in rent. If the lease has less than two years to run, you might want to spend the money now to negotiate a new lease with a five- to 10-year term. Also find out if the landlord is holding a security deposit (usually two months' rent, but sometimes more).
5. Are there prepaid expenses? Take Yellow Pages advertising, for example. When you buy a Yellow Pages ad, you normally pay for a whole year in advance. Chances are your closing will take place sometime during the year, and the seller will want to be reimbursed for the portion of the year when you're running the business and benefiting from the Yellow Pages ad. Prepaid expenses--like the seller's security deposit--usually aren't included in the agreed-upon purchase price but are tacked on at the closing.
6. Negotiate a "letter of intent." Also called a "term sheet," a letter of intent (or LOI) is a short, two- or three-page agreement between the buyer and seller of a business that spells out all the important terms and conditions of the sale.
7. Make sure the seller sticks around for a while. In many retail and service businesses, the customers have a personal as well as business relationship with the owner. Be sure the seller continues to make an appearance at the business for a few weeks after the closing to introduce you to customers, help you figure out the books and "ensure a smooth and orderly transition of the business."
8. Get to know the employees. Before you buy a business, make sure the "key employees" are willing to stick around, since they're often the ones who see the customers day to day, operate all the tricky machinery and know "where the bodies are buried." Many sellers will be reluctant to let their employees know the business is up for sale, for fear they'll quit en masse.
Explanation / Answer
a) Using your knowledge about entrepreneurship, discuss some important considerations that an entrepreneur has to be aware of when acquiring a company as compared to establishing a new set-up
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