Buying an Existing Business
Buying an existing business is one way of getting your new venture up and running. Perhaps a business owner is getting ready to retire and wants to pass her shop to someone new, or you have a strong business plan that you think would reinvigorate an existing enterprise. There are many reasons why buying an existing business can be a good option, such as reduced start-up costs and time, an existing customer base, and pre-existing knowledge of how the business performs.
However, it’s critical to do your due diligence and make sure that the business you’re buying is foundationally sound – for instance, you may not want to buy a business that has many debts that you may owe or need to collect. Also, make a clear assessment of what you are buying: does the business come with the building, or is it still being leased? What equipment and assets will be included? For instance, if it’s a restaurant, will you be able to keep the menu and use the recipes? Will you take over the website and have access to the customer mailing lists?
A business broker is a licensed professional for buying and selling businesses. Similar to a real estate broker, they can act as an intermediary between you and the business owner and help you locate a business to purchase, assess the value of the business and negotiate the purchase. Business brokers typically operate on a commission, so make sure that you find someone who you work well with and trust. Depending on the complexity of the purchase, you may also consider hiring an attorney to help you prepare an asset purchase agreement and negotiate the final terms of the transaction.
Things to Consider
There are many things you should consider before purchasing a business. Some key items include:
Inventory and Assets
Conduct an in-depth assessment of the inventory and other assets – such as furniture, fixtures, equipment, and the building – so you can know its condition and value. This approach can also serve as a starting point to determine the value of the business.
Zoning and Permits
Review the zoning for the property to make sure that the business conforms to the building code and that any changes or alterations you plan to make to the building are allowed within the property’s zoning requirements. Otherwise, you may need to make expensive or time-consuming changes. Depending on the business type, you may also verify that the business’s licenses and permits are up to date and review any terms or conditions attached to them. For instance, if the restaurant has a liquor license, you will want to find out if it is transferrable to a new owner.
Contracts, Legal Documents, and Loan Information
Make sure to receive and review any contracts, legal documents, and loan information that the seller has that may impact you as the new business owner. Make sure you are comfortable with the terms and assess whether you would be able to either terminate, re-negotiate or transfer ownership to yourself. This review may include items such as:
- Leases for the building and/or equipment
- Contracts with suppliers and for equipment maintenance
- Employee contracts, including information about wages and other benefits
- Amounts owed to/by suppliers or other stakeholders
Reputation and Relationships
Review information that’s publicly available about the business such as whether there have been any complaints with the Better Business Bureau, and how well the business is represented online.
Talk with customers, employees, and vendors to get an in-person assessment of how strong the relationships are, how well you think you would work together, and how well the business is doing.
Tax Returns, Financial Statements, and Sales Records for the Past Five Years
Request all financial documents, including financial statements, accounts payable/receivable, and tax returns, for the past three to five years. This will help you determine the profitability of the business if there are any outstanding tax liabilities and the actual financial net worth of the business. You may need to enter into a confidentiality agreement with the business owner to obtain this information.
Reporting Bulk Sale After Purchasing a Business
If you decide to purchase the business, you will be responsible for reporting a "bulk sale" to the state Division of Taxation. A bulk sale is the sale, transfer, or assignment of an individual or company's business assets, in whole or in part. Assets subject to a bulk sale may include tangible property, such as inventory or materials, real property (land, buildings, etc.), or intangible assets, such as goodwill.
Recent Regulations and Resources
Buying a Franchise Business
A franchise is a business relationship where the franchiser provides a license to a franchisee for a fee. This license gives the franchise assistance in organizing, training, merchandising, and management. A franchise operation may resemble a business chain with standardized branding, services, products, practices, and marketing determined and controlled by the franchiser.
The franchiser may determine:
- Location analysis and counsel
- Recommendations on methods of operation
- Aid in store development - including lease negotiation
- Store design and equipment purchasing
- Initial employee and management training and continuing management counseling
- Advertising and merchandising counseling and assistance
- Standardized procedures and operations
- Centralized purchasing
- Financial assistance to establish the business
A reliable franchise program will offer you:
- A federally registered trademark and a state-registered trade name
- A reliable, affordable product or service
- A training program that will provide hands-on experience in every operation of the business
- A detailed and readable operations manual
- Support for the franchisee and his staff on everything from site selection to decor, inventory, and grand opening advertisement
- Managerial training, including regional and national meetings, seminars, and assistance in operations and accounting procedures
- Marketing, merchandising, and advertising support
- Monthly newsletters to keep the franchisees informed of the latest activities and trends
- Multi-store, multi-office, or territorial expansion options
- A continuing program of new project development and testing
- Purchasing benefits from the franchiser to buy products in volume with savings
- The strength of a national, regional, or local network of independently owned and operated franchisees and all franchise operations
The State of New Jersey is not a franchise registration state. This means that if you would like to offer or sell a franchise in the State of New Jersey you are not required to register your Franchise Disclosure Document (“FDD”) with a New Jersey State regulator. Nevertheless, you must ensure that your New Jersey franchise offering complies with the Federal Franchise Laws by maintaining an updated FDD and disclosing it to prospective New Jersey franchisees before offering or selling your franchise.
If you are starting a franchise, you should follow standard business registration procedures. Once you register your business, you may want to consider creating an alternate business name that is in line with the franchise’s name.
Things to Consider
Investigate the franchise business thoroughly, the industry and territory you’re considering, and compare it with other franchises. You can request detailed information directly from any franchise you are considering. Below is a list of considerations for deciding on a franchise:
Study Disclosure Statements
The franchiser is required by law to give you a disclosure statement (sometimes called an “offering circular” or “prospectus”) describing their franchise system and your obligations as well as certain required information such as the franchise’s litigation and bankruptcy history, and a list of current and former franchisees. This information will help you compare franchises, understand the risks, and set your expectations.
You may contact the franchises listed in the disclosure statement to ask about their experience in the business and they can verify that the information provided by the franchiser accurately reflects the franchise experience. New franchise owners and those who have been in business for a few years can offer unique insights regarding financial arrangements, the start-up and ongoing assistance provided by the company, and how much profit can realistically be expected.
Question Earnings Claims
A franchiser can only provide some information about the sales, income, or profits of the franchised business in its disclaimer. However, upon request, franchisers are required by law to provide detailed substantiation of any earnings they claim to make. This documentation will show you what percentage of the present franchisees have had sales, profits, or income that equaled or exceeded the amount claimed.
Obtain Professional Advice
Do not assume that the disclosure statement tells everything about the consequences of signing a franchise agreement and related contracts. The disclosure statement is not designed to serve that purpose.
The advice of a lawyer is the most important professional opinion to obtain before investing in a franchise. A lawyer can advise about legal rights in entering a franchise agreement, any legally binding obligations, and may be able to suggest important changes in the contract to better protect your interests. They can also advise you of any state and local laws that may affect the franchise business, if the agreement is compliant with FTC regulations, and will assist with the taxation and personal liability questions that must be considered in establishing any new business.
The cost of obtaining legal advice will be relatively small in comparison to the total initial investment for a franchise. Moreover, the cost of legal advice at the outset is less than the cost of late representation to solve legal problems that could have been avoided.
At the very least, prospective franchisees should be certain that every promise made by the franchiser and his representative is stated clearly in the written franchise agreement. If such promises do not appear in the contracts you sign, the franchiser may not be legally obligated to perform anything said.