There are some advantages to buying an existing business. And there can be drawbacks. Here are 3 things you must know before you buy a small business.
Before You Buy A Small Business
The big question you rarely receive a proper, honest answer;
Why are you selling?
This is a question most sellers have practiced an answer for you, and many times, it may not be the truth.
Sure, buying a business has plenty of benefits over starting a business from scratch. You should inherit a customer base. You will likely keep the more valuable employees. You are getting the equipment or inventory. And you’ve done your due diligence and looked long and hard at the sales records.
While no one has a crystal ball and can predict the future, here are 3 things to be alert for before you buy a small business.
Demographics, zoning and politics
If you are looking at a business that sells to teens, then find after the sale, the high school is closing and now they are bused 20 minutes to the other side of town. Or a new plaza is about to open and divert traffic, and they got a heads up from a friend in politics. Get the picture? Be aware! Additionally, visit the local Planning and Development Office and see if there are any proposed traffic changes or zoning law changes that would change the “permitted use” at the business location.
Owner Income Overstated
Owner income is what is left in the till when suppliers, rent, utilities, taxes and employees are paid. It’s fairly common for this to be overstated, especially if there is a mix of credit and cash sales.
Beware the seller who tells you his actual income is greater than what he reports. If he’s taking extra cash out of the till, understating income on tax returns, or treating personal expenses as business expenses for tax write-offs, what are the odds he is being honest with you?
And…
When you buy a business, you don’t owe on any of the prior owners debts…except for…
Back Sales Taxes
If your seller has been under-reporting sales taxes, and the state tax authority finds out about it, they can (and will) come after you for everything the seller owed.
Don’t pay a thin dime for a small business until you know the seller has filed all state and local sales tax returns, is up to date, and paid in full. Additionally, you should ask your attorney if you can get a “tax clearance certificate” from the state tax authority saying they won’t come after you for any sales taxes your seller owed.
For more information on new owner liability for back sales taxes in Texas visit the Texas Comptroller Website.
With offices in Dallas/Fort Worth, Houston, San Antonio, El Paso, Austin and Lubbock, Elan can help you purchase a new business safely and securely.
When buying a business, it is extremely important to find quality professionals that specialize in business transactions of the size and type you are considering. It is incumbent upon you to take the time to learn what is involved and how to successfully navigate your way to fully realizing your goals.
