If you have entrepreneurial dreams, you may have a business idea you want to pursue. However, starting a business from scratch takes a lot of time and work.
One option is to purchase a successful existing business. Unfortunately, many small businesses are structured as limited liability companies (LLCs), and buying can be a rather involved process. Fortunately, this handy guide provides all the information you need to begin your entrepreneurial journey.
What Is an LLC?
An LLC is a popular business structure for startup companies due to its many benefits. An LLC provides personal liability protection, for example, so your assets are not at risk if your business is sued or cannot pay its debts.
Also, an LLC is a “pass-through entity” in taxes, meaning that the LLC itself is not taxed. Instead, income passes through the company to the LLC owners or members, who report it on their tax returns.
LLCs also offer flexibility in management, as there are few requirements regarding organizational structure.
Choosing a Business to Purchase
Your first step is to find a business that’s attractive enough to purchase. After that, your best bet is to select a business that offers a product or service you know and are passionate about.
You have a few options to find the right business for you.
- Find a local business broker. Business brokers are like real estate agents for businesses, hired by business sellers to find buyers. They can be helpful not only in finding a business to buy but can also help the transaction go smoothly.
- Contact the owners of local businesses that interest you. For example, they may be considering selling but haven’t put it on the market. Or they may know another business looking to sell.
- Attend local chamber of commerce events to put out feelers. Business communities tend to be close-knit, so you might find someone who knows of a business for sale.
- Use business search websites like ZoomInfo, LoopNet, and BizBuySell.
The Purchase Process
Once you find a business you’re interested in, the first step is to gauge the company’s value before making an offer. Assuming it’s a private, rather than publicly traded, business, you won’t have access to the company’s latest revenue and profit data.
Instead, you’ll need to assess the company’s age, size, popularity, media coverage, and brand reputation. You may want to hire an accountant to help with your assessment and an attorney to make sure your offer, when you do make it, is appropriately structured.
Your offer should be contingent upon being able to review the LLC’s financial statements, which will help determine the final purchase price. You might also hire a business broker to represent you.
You’ll likely go through a process of negotiation before agreeing upon terms, including:
- Purchase price
- Structure of the deal: what assets you’re buying, how the LLC transfer will occur, etc
- Whether you’re paying cash, bank loan, or financing the purchase
- Any additional rights to the business the seller might have
- Non-compete provisions restricting the seller from starting a new competing business
- Closing date
Once you’ve negotiated terms, you still have work to do. First, you’ll want to conduct a due diligence process to learn everything about the business that could impact its market value.
You should review the following:
- Financial statements and tax returns for the previous three years
- Existing loan agreements and debts
- Business licenses and permits
- Contracts with employees, vendors, landlords, etc.
- Articles of organization and operating agreement
Once you’ve reviewed all the information with your accountant and attorney, you’ll be ready to negotiate the final terms of the deal, which will be spelled out in a term sheet.
This will include all the terms listed above. Once the term sheet is finalized and signed, your attorney, probably in conjunction with the seller’s attorney, will draw up the purchase agreement.
To close the deal, you and the seller will sign the purchase agreement plus other documents that may include:
- Assignments of leases or other contracts
- Assignments of vendor agreements
- Non-compete documents
- Non-disclosure agreements
The Transfer of the LLC
The operating agreement of the LLC should contain procedures for the transfer of ownership, and those provisions will be part of the deal that you close. Of course, state laws also come into play when determining how ownership is transferred.
You will most likely have to record the sale with the state’s secretary of state, which will transfer the ownership of the LLC. The operating agreement should also specify how the LLC’s assets will be transferred.
Some states do not allow the transfer of LLC ownership. If that’s the case, the LLC will have to be dissolved, its assets distributed per the terms of the operating agreement, and a new LLC formed.
All involved parties will need to be notified, including the registered agent of the LLC. Unless you want to continue to use that registered agent, you’ll need to appoint a new one and file a change of registered agent document with your state.
Other parties to notify include tax authorities, banks, and parties to any contracts with the LLC. Finally, you’ll need to obtain a new employer identification number (EIN) for the business.
Purchasing a business is a big step, and it’s also a process that needs to be handled with great care to protect all parties. Your accountant and attorney should be deeply involved to ensure you get a fair deal that puts you on the path to success.