10 Things Commonly Overlooked Before Buying a Business

You are ready to grow, have the resources to spend and want to purchase an ongoing business concern.

Especially now, the present economy offers many delectable opportunities. Recessions offer rare opportunities and typically create a buyer’s market where buying business are concerned. Many businesses are being offered at lower prices due to recent drops in sales. If you have cash, or access to financing, that puts you in an enviable position. The decrease in availability of credit has caused a slump in business transfers. In fact, SBA’s 2012 budget for lending was down 45% from 2010. With the impending retirement of the baby boomer baby boomer population, millions of businesses are up for grabs. It is well known that a driving factor for many sellers is their impending retirement.

With so many business opportunities to choose from, in your eagerness to buy, buy, buy and make money, money, money, you can easily overlook some factors or hidden liabilities that make the purchase of an ongoing concern your nightmare waiting to happen.

There are a few obvious things a buyer typically reviews when buying a business:

• Tax returns
• Cash flow
• True value of assets held in company
• Salaries and perks to present owners
• Present client base
• Lease or rental agreements
• Valuation of business
• Licensing and permits needed
• Present marketing strategies

Fiduciary issues with the company retirement plan.

The business owner, referred to as the plan sponsor, is legally responsible for the upkeep and results of the company sponsored retirement plan. The business owner, not the broker who sells and installs the plan, is responsible for keeping the plan in order according to the department of labor. In order to keep the retirement plan from becoming a large liability, make sure:

• The investments selected have been selected in accordance to the company’s stated Investment Policy Statement (IPS).
• The investments are being monitored on a regular basis for performance that matched the criteria in the IPS.
• The present investment selection offered is appropriately diversified
• The Plan documents are up to date with current regulations
• The fees being charged to the employees are transparent and reasonable
• The employees have access to regular education to completely understand how to use the present plan and successfully retire
• Plan loans are being monitored and have been made in a satisfactory manner
• Appropriate documentation of all above to ensure the safety of the plan sponsors 
• The plan service providers have been scrutinized for complaints internally in the company and externally with their broker dealers to insure the satisfaction of the employees.

Using freelance contractors (1099’s) instead of W-2 employees.

There has been increased scrutiny on behalf of the IRS in reference to this employment practice. 1099’s are tempting because they save the business owner many traditional employee related expenses like health  benefits , unemployment, workers comp, state disability and social security contributions. The use of free-lance employees also gives the business owner greater flexibility in expenses as business revenues fluctuate. Before entering into the buy/sell dance with a business make sure to use the 20 part test as it applies to 1099 contractors that are part of the business to make sure you do not inherit this costly liability.

Ok, we will stop here and continue this next week right here at the NYER site. Remember, buying a business is a complex and exciting process. This article is not meant to be an exhaustive list of all the diligence that a prospective buyer should consider in the transaction, but a list of areas that are not usually addressed, thus can cause issues for the business in the years and decades to follow after the sale.  For any questions about this article or comments, please email Jeanne at jeanne@jeannebrutman.com.