A major concern of anyone buying a business should be whether or not they will be exposed to any of the seller’s liabilities.  Successor liability (i.e., a buyer being held liable for a seller’s obligations) exists in the following situations:

1. Stock Purchase instead of an Asset Purchase.  If a buyer purchases a business by acquiring the common stock of a corporation, the partnership interests in a partnership, or the membership interests in a limited liability company, the buyer steps into the shoes of the seller as the owner of the entity.  The entity continues to own its business assets, and the entity continues to be responsible for its obligations and liabilities.

A seller of such an ownership interest is obligated to disclose the entity’s known liabilities to a buyer, but another major concern to a buyer should be the “contingent” liabilities of that entity.  Contingent liabilities are those liabilities that have been incurred by the entity prior to the ownership interest being acquired by the buyer, but the seller is unaware of them.  Contingent liabilities may or may not turn into actual obligations.  For example, a customer that slips and falls in a store before an acquisition might or might not file a lawsuit against the entity for their injuries.

In general (see exceptions below), a buyer can avoid these contingent liabilities by structuring the purchase transaction as an asset purchase.  In an asset purchase, the buyer acquires the business assets, but not the business liabilities.

2. Public Policy Exception for Manufacturing Businesses (the “Product Line Successor” rule)

Although structuring the purchase transaction as an asset acquisition will normally protect a buyer from a seller’s contingent liabilities, California’s Supreme Court has created an exception that applies under certain limited circumstances for manufacturing businesses.

Thus, even when a buyer acquires just the assets of a manufacturing business, courts have imposed liability where all of the following apply: (1) the plaintiff's remedies against the original manufacturer have been destroyed as the result of the successor's acquisition of the business; (2) the successor has the ability to assume the original manufacturer's risk-spreading role; and (3) it is deemed to be fair to require the successor to assume a responsibility for defective products because it was a burden necessarily attached to the original manufacturer's goodwill that is being enjoyed by the successor in the continued operation of the business.

The best protection for a buyer against this type of liability would be to obtain insurance that provides coverage against this sort of claim.  Such insurance could be either obtained by the buyer to cover liabilities arising prior to the acquisition or by requiring the seller to carry insurance against this sort of claim for a reasonable period after the acquisition.

3. Failure to Comply with Bulk Sale Laws

In an asset sale, successor liability for the seller’s trade credit may also exist where a buyer acquires more than one-half of the seller’s inventory and equipment.  The buyer can obtain protection from such liability by complying with California’s bulk sale laws.  These laws protect trade creditors by imposing liability on the buyer, unless the buyer provides appropriate notice of the bulk sale.  The notice must contain specific information, and it must be recorded, published and provided to the county tax collector.

Bulk sales law also provides a mechanism for creditors making claims on the purchase money consideration.  These laws do not apply to all businesses, but they do apply to businesses that purchase and sell inventory.  Because of the complexity of complying with the bulk sales laws, buyers should open a bulk sale escrow with a reputable escrow company to ensure that bulk sale procedures are followed.

4. Taxes

While a buyer is not obligated to pay the seller’s income taxes when the transaction is structured as an asset sale, successor liability may exist for California Sales and Use Tax, taxes payable to the California Employment Development Department, and taxes required to be withheld by the California Franchise Tax Board.

A buyer is required to withhold a sufficient portion of the purchase price to cover the seller’s liability for California Sales and Use Tax until the seller produces a receipt from the Board of Equalization showing full payment or a certificate indicting that no amount is due.  This liability includes both taxes due from the sale of the assets to the buyer and taxes from prior sales made by the seller.

A buyer is also required to withhold a sufficient amount to cover the seller’s due or unpaid contributions to the California unemployment fund, employment training fund, and unemployment compensation disability fund until the seller produces evidence from the Employment Development Department that no such payments are due.

A similar withholding requirement exists for the seller’s taxes required to be withheld under California’s franchise and income tax laws, and buyers should obtain a release from the Franchise Tax Board to avoid liability for these taxes.

To avoid being saddled with the seller’s tax liability and related penalties, a buyer would be wise to acquire the business through a business escrow service.  The escrow officer will either obtain the necessary releases from the taxing authorities prior to closing escrow or withhold enough of the purchase price from the seller to pay these taxes if any are due.

About The Author:  Joe Sandbank is an attorney specializing in assisting business buyers, business owner/sellers, business brokers, and agents with legal matters pertaining to buying and selling businesses throughout California. Joe can be reached direct at 800-875-1480.

Watch for more blog posts / articles from me in the future!

See all contributions from Joe Sandbank

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  Tags: buying a business, buy a business

Depending on the type of business, a month-to-month situation can be severely detrimental to the value of the business. For example, if you are the owner of a mailbox store for sale, it is unlikely a Buyer would risk buying the store without a solid long term lease. The customers renting the mailboxes are tied to that specific address. If the store is forced to relocate, many customers and thus much revenue would potentially be lost.

On the other hand, if you are the owner of a wholesale distribution business and you have no walk-in traffic, it makes no difference where the business is located. The Buyer may desire to relocate the business in which case a month-to-month situation is highly desirable.
If your business is retail and your clients are local, you may be able to relocate the business within the same area and retain most if not all of your customers -- as long as they know where to find you.

There is no "one size fits all' answer or solution in business transactions. That is part of the challenge. Every business is unique as is every Buyer and every Seller. A good business broker must be a creative problem solver and must focus on making sure the Buyer and the Seller both get what they need from the transaction.

See all contributions from Tawnya Gilreath, CBB

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  Tags: sell a business, selling a business, franchises for sale

Utilizing Your 401(k) or Retirement Funds for Business Purchase Financing

This is a FREE Online Webinar

Upcoming Dates:  Tuesday, June 30th at 6PM-7PM  Pacific Time

Cost:  FREE

Learn how to:

* Buy a business without paying taxes or penalties!
* Invest in yourself!
* Increase cash flow!
* Eliminate Debt!
* Maximize your returns and tax benefits!

You can use the money for:

* Business Expenses
* SBA loan down payment
* Franchise fees/Business deposits
* Business Recapitalization
* Inventory
* Employee compensation
* And More!

In this online webinar we will discuss how investing your 401(k) funds into a business works, the “do’s and dont’s” of operating the plan, and maximizing your 401(k)s profit potential while investing in your own future.

Don’t miss out! One of the nation’s premier 401(k) business rollover specialists, Cyrus Safavian, is hosting the event to answer all of your 401(k) rollover questions!

When: Tuesday, June 30, 2009 6:00 PM-7:00 PM (GMT-08:00) Pacific Time (US & Canada).
 
Note: The GMT offset above does not reflect daylight saving time adjustments.
 
*~*~*~*~*~*~*~*~*~*
 
1.  Please join my online webinar.

https://www2.gotomeeting.com/join/584321194
 
2.  Use your microphone and speakers (VoIP) - a headset is recommended.  Or, call in using your telephone.
 
Dial 646-558-2103

Access Code: 584-321-194

Audio PIN: Shown after joining the meeting
 
Meeting ID: 584-321-194

Please phone Cyrus at 425-647-5593 if you have any questions or for more information.

See all contributions from Cyrus Safavian

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  Tags: buying a business, buy a business, entrepreneurship

Visitors to BizBen on Sunday 6/28/09 top picks/searches included a Pasadena Area Laundromat, a Beach Location Mexican Restaurant, a San Diego Mobile Cafe, a Sacramento Pizza Franchise, a San Jose Gas Station, as some of the more popular California small and mid-sized businesses for sale that were added and reviewed by business buyers, business brokers, agents, and small business owners yesterday on BizBen.com. 

Yesterday's BizBen Top Search Results/Clicks Included:

1. Laundromat for sale located in Pasadena Area - Price: $190,000, Adjusted Net: $42,000. Well Established Coin Op With Consistent Cash Flow Of $30,000 Plus Annually.

2. Mexican Restaurant for sale located in Beach Location - Price: $99,000, Adjusted Net: $103,000. Newer Equipment, Remodelled In 2005, Counter And Table Serv.

3. Mobile Cafe for sale located in San Diego - Price: $87,000, Adjusted Net: Call/Email. High Traffic Location, Beach Area, 450/Month Rent.

4. Pizza Franchise for sale located in Sacramento - Price: $197,000, Adjusted Net: Call/Email. Popular Pizza Franchise. Monthly Sales To The Tune Of $40,000.

5. Gas Station, Market, Car Wash, Real Estate for sale located in San Jose - Price: $3,100,000, Adjusted Net: Call. Major Brand With R/E, Gas, Market, Car Wash, Absentee.

6. Mexican Restaurant for sale located in Chino - Price: $175,000, Adjusted Net: Call/Email. Mexican Restaurant Newly Remodeled.

7. Lamp & Chandlier Sales & Repair for sale located in Palm Desert - Price: $69,000, Adjusted Net: Call/Email. Selling All Sizes And Styles Of Lamps, Table Lamps, Shades, Bulbs, Chandeliers.

8. Curves Fitness Center Franchise for sale located in Palo Alto - Price: $11,850, Adjusted Net: Call. Great Location, Members, Staff And Parking. Free Standing Building.

9. Car Wash, Lube, Real Estate for sale located in San Gabriel Valley - Price: $2,800,000, Adjusted Net: $290,000. Car Wash+ Lube Servicw + R/E - Owner Carry Up To 1 Million.

10. Dude Ranch, Trout Ponds, Resort, Real Estate for sale located in High Sierras - Price: $3,900,000, Adjusted Net: Call. Dude Ranch, Pasture, Trout Ponds, And Water Rights.

11. Liquor Store for sale located in L.A. County - Price: $315,000, Adjusted Net: $95,000. Potential And Low Rent Liquor.

12. Gas Station for sale located in San Jose - Price: $1,570,000, Adjusted Net: $220,000. Major Brand With R/E, Gas, Snacks, Garage. Very Profitable.

13. Italian Family Pizza Restaurant for sale located in San Bernardino - Price: $180,000, Adjusted Net: $72,000. 25 Years Old Established And Profitable Italian Family Restaurant.

14. Restaurant for sale located in SF Bay Area - Price: $880,000, Adjusted Net: $360,000. Prime Location, New Big Street Shopping Mall In Fremont.

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  Tags: small business, entrepreneur, entrepreneurship

Making the transition from worker bee to small business owner involves a great deal of time, effort, money, and personal commitment.  It is not a decision to be made hastily nor taken lightly.  There are certain questions you need to ask and certain elements to consider, with every step along the way a potential pitfall.  How successful you become—both personally and financially—will depend in great part on how prepared you are at the beginning of the journey.  Here are some of the most vital questions to consider.

What Type of Business Should I Own?

Your knowledge, business experience, temperament, personal interests, and comfort level in a particular field all contribute deciding on which industry you should consider.  If you don’t like hanging around other people’s children, don’t start a daycare center.  If you hate sitting in front of the computer all day long, perhaps a career as an IT consultant is not for you.  If you have the same problems with the sun as does comedian Woody Allen—“I don’t tan, I stroke”—a landscaping business may not be your best option.  Matching your abilities and interests to the industry you want to join is the first positive step to take.

Where Do I Get the Money?

It is the rare business these days that can be started with just pocket change.  That said, you don’t have to be a multi-millionaire in order to become a first-time business buyer.  Options abound for the enterprising soul, including buying a business from an owner who is willing to provide some or all of the financing.  You can also consider a home equity loan, bringing in one or more partners—friends or relatives who might fulfill an active role in the business or else act as passive investors—or tap into your Roth I.R.A. fund, your 401(k) plan, or a pension account.  In this area, creativity will rule the day.

Do I Buy a Franchise or an Existing Business?

After deciding on the field or industry and examining your financial capabilities (or limitations), the type of business worthy of your consideration will most likely fall into one of two basic categories.  A franchise is a small business that is part of a larger corporation.  Many of the big brand names out there—McDonald’s, Grease Monkey, Merry Maids, KinderCare, and so on—are actually individual franchises owned and operated by people just like you.  In addition to having an instantly recognizable name, you will enjoy the backing of a multi-million or -billion dollar enterprise, along with regional or national marketing campaigns and many other benefits.  But franchises rarely come cheap, and it is not unusual for a major industry name to cost you upwards of six figures just to open the doors for business.  None of those safety nets are available to the person who buys an existing business, and polls have shown that franchise operations generally enjoy more success than their stand-alone counterparts.  However, by buying a business directly from its owner, you may be able to negotiate a better price, talk to him or her into sticking around to show you how the business should be run, and even have the seller provide some or all of the financing on much better terms than you would find at the bank.  Starting a business from scratch is a third path, but the prospects of failure—especially for a first-time business owner—are generally too high to make this a worthwhile option.

What Else Should I Know?

If you are focused on buying a franchise, make sure you examine every bit of material the parent company is compelled to provide.  This is called the “due diligence” phase, a term that originated in the 1930s that referred to stockbrokers and how they were legally required to explain everything about a transaction to their clients.  From the standpoint of a first-time business buyer, this would include statements on the financial health of the corporation, the level of success enjoyed by the average franchisee, what your exact costs will be and what they’re applied against, how much training you should expect to receive, and so on.  If you’re buying an existing business, the owner will show you profit-and-loss statements going back five or more years, list every asset and liability the company has and owes, and lots more.  You will also want to scope out the competition and obtain an independent analysis of the value of everything that is part of the sale, from the true worth of the building to what it would cost to replace that 20-year-old pizza oven.  For this step in the process, you should rely on the know-how of experts—real estate appraisers, business brokers, accountants, attorneys, and bankers.  Spending a few thousand dollars at this stage of the game can save you ten or hundreds of thousands on the back end.

About The Author:  Ash Rasaei  of Prudens Business Advisors assists business buyers and sellers in the sales and acquisitions of businesses in the 100K to 20M range in Los Angeles, Orange & San Diego County.  Ash can be reached by phone at 310-622-8777.

Watch for more blog posts / articles from me in the future!

See all contributions from Ash Rasaei

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  Tags: buying a business, buy a business

How is a LOI different than a purchase agreement? What should be included in both?

While a purchase agreement is a binding contract with rights and obligations for each party that contains all the terms and conditions of the transaction; a preceding Letter Of Intent (LOI) is often overlooked for its significance. Although non-binding a comprehensive LOI with the same deal points will benefit both the seller and the buyer.  When all major sales terms, key ancillary agreements and important conditions are negotiated and agreed on by both parties they are in a position of much higher degree of success and their true intention of moving forward on the deal. Some of the basic items of a typical LOI should contain purchase price and terms; assets covered and delivery date; due diligence period; closing date; investigation of the business; consulting arrangements with owner or key employees; confidential information; releasing of public information, expenses and conditions  to closing.

When a seller accepts an LOI with the desired deal points he has exercised his strength in an active market with multiple buyers and further reduce opportunity loss of other qualified buyers by removing the business off the market during the due diligence period. The buyer would reduce potential disagreements on open items and the need for renegotiation. And they both would reduce the chance of wasting precious time and incurred expenses. Having an experienced agent will guide you through the entire process, make recommendations and handle the negotiation on your behalf.

About The Author:  KC Choi founder of Power Business Solution, Inc. offers business brokerage services to both buyers and sellers in the Los Angeles and Orange County areas. His business team includes 15+ professionals (multi-lingual) with extensive experience and knowledge with business transactions.  KC can be reached by phone at 714-345-6774.

Watch for more blog posts / articles from me in the future!

See all contributions from KC Choi

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  Tags: buying a business, buy a business

It is estimated that 80% of all individuals who set out to buy a small to mid-sized business never do so. There are many reasons why potential business buyers never end up buying a business but this workshop explores what problems and difficulties business buyers usually encounter and how to successfully overcome them. This online workshop covers everything from the right ways to search for a business to negotiating and closing the deal.

Presenter:  Peter Siegel, MBA

Co-Presenters:  None At This Time

Co-Sponsored:  East Bay SCORE Chapter

Date:  July 15th - Wednesday Evening

Time: 8PM - 9PM Pacific Time

Who Should Attend: This webinar course is designed for potential business buyers who are looking to buy a small to mid-sized business and need the tools to actively search, find, and close on a deal.

Information & Skills Attendees Will Learn:

• How To Correctly Search & Find The Right Business For You
• How To Accurately Value Small & Mid-Sized Businesses In Today’s Market
• What Forms, Documents, & Information You Should Have Ready
• Learn The Correct “Protocol” Of Working With Brokers & Owners
• Why Non Disclosure Agreements & Buyer Profiles Are Important
• Dealing With Business Brokers, Agents, & Owners
• What To Look For In Tax Returns & Financial Statements
• Getting Brokers/Agents/Owners To Return Your Phone Calls & Emails
• Ideally Structuring The Deal That Is Best For You
• Get The Best Financing To Leverage Your Purchase
• Escrow & Transition Strategies To Ensure A Success Future
 
This one hour online webinar also includes all the questions you would like ask.

Fee:  FREE

To Register For This FREE Online Webinar Go To:

https://www1.gotomeeting.com/register/151109681

to register online and to get more information.

See all contributions from Peter Siegel

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  Tags: buying a business, buy a business

Elin Chistyakov a business buyer in the LA County area is searching for a yoga studio in the LA County area preferable in the San Fernando Valley, West Los Angeles, West Hollywood, Santa Monica area.

She is looking for a studio with a minimum adjusted net of $80K after debt service.

If you have a yoga studio for sale or know of one that may be willing to sell that matches Elin's search criteria please phone her at 310-740-7413.

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  Tags: buying a business, buy a business

Business buyer Bob Behzad is looking to buy an assisted living facility in the Orange County area - as close to Irvine as possible. Open to buying the business only or with real estate. The assisted living facility should have at least 4 rooms minimum.

Bob will be in the Southern California area for 2 weeks starting Wednesday June 24th.

He has prior experience in the industry just selling a facility in the Houston, Texas area. He has $200K for a down payment and would like the assisted living facility in the Orange County area but is open to the Riverside County area - he would like it to be as close to Orange County as possible.

Please phone Bob Behzad (buyer) at 713-253-7731 if you can assist him with his request.

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  Tags: buying a business, buy a business

The most common question clients ask me is how fast can we secure them funding.  While there are many steps we must pass through from start to finish my answer is “it’s all up to you.”  This statement often catches people off guard but it is the absolute truth.  There are certain items you must have ready in order to start presenting to lenders.  Your quest for financing will be much faster if you have the following items ready, preferably in electronic format:

*  Past 3 years personal tax returns for all owners with 20% or more ownership (Federal Returns only)

*  Personal Financial Statement (you can download one from the SBA website or call me for one)

*  For any other affiliate company with at least 20% ownership by an owner of applicant business you will need to provide the past 3 years corporate tax returns

*  Resume

*  Signed Purchase Agreement

*  Brief write-up about the business

*  Past 3 years corporate tax returns of the business you are purchasing

*  Past 3 years P&L and Balance Sheet of the business you are purchasing

*  Interim P&L and Balance Sheet of the business you are purchasing

*  Reason the current owner is selling

*  Minimum of your first 12 months projected P&L

If you have all of these items ready to go it will help get your transaction into underwriting much faster.  If you are in the early stages of searching for a business to buy then simply have your personal items available for review, once you have identified the business you desire we can then request the items needed from the seller.  A complete package is more likely to be put at the top of an underwriters pile whereas an incomplete package can drastically reduce your changes of funding altogether.

About The Author:  Jonathan Smith is a financing/loan broker, consultant who assists with larger loan amounts ($500K to $5M) - SBA loans, conventional financing, and private lenders for business purchase financing. We works with business buyers, owner/sellers, business brokers, and agents. For assistance with business purchase financing options phone him direct at 888-859-9838.

Watch for more blog posts / articles from me in the future!

See all contributions from Jonathan Smith

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  Tags: buying a business, buy a business