Leases should never be overlooked when it comes to buying or selling a business. After all, where your business is located and how long you can stay at that location plays a key role in the overall health of your business. It is easy to get lost with “larger” issues when buying or selling a business. But in terms of stability, few factors rank as high as that of a lease. Let’s explore some of the key facts you’ll want to keep in mind where leases are concerned.
The Different Kinds of Leases
In general, there are three different kinds of leases: sub-lease, new lease and the assignment of the lease. These leases clearly differ from one another, and each will impact a business in different ways.
A sub-lease is a lease within a lease. If you have a sub-lease then another party holds the original lease. It is very important to remember that in this situation the seller is the landlord. In general, sub-leasing will require that permission is granted by the original landlord. With a new lease, a lease has expired and the buyer must obtain a new lease from the landlord. Buyers will want to be certain that they have a lease in place before buying a new business otherwise they may have to relocate the business if the landlord refuses to offer a new lease.
The third lease option is the assignment of lease. Assignment of lease is the most common type of lease when it comes to selling a business. Under the assignment of lease, the buyer is granted the use of the location where the business is currently operating. In short, the seller assigns to the buyer the rights of the lease. It is important to note that the seller does not act as the landlord in this situation.
Understand All Lease Issues to Avoid Surprises
Early on in the buying process, buyers should work to understand all aspects of a business’s lease. No one wants an unwelcomed surprise when buying a business, for example, discovering that a business must be relocated due to lease issues.
Summed up, don’t ignore the critical importance of a business’s leasing situation. Whether you are buying or selling a business, it is in your best interest to clearly understand your lease situation. Buyers want stable leases with clearly defined rules and so do sellers, as sellers can use a stable leasing agreement as a strong sales tool.
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Buying a business can be an exciting prospect. For many prospective business owners, owning a business is the fulfillment of a decades long dream. With all of that excitement comes considerable emotion. For this reason, it is essential to step back and carefully evaluate several key factors to help you decide whether or not you are making the best financial and life decision for you. In this article, we’ll examine five key factors you should consider before buying a business.
What is Being Sold?
If you hate the idea of owning a clothing store, then why buy one? The bottom line is that you have to have a degree of enthusiasm about what you are buying otherwise you’ll experience burnout and lose interest in the business.
How Good is the Business Plan?
Before getting too excited about owning a business, you’ll want to take a look at the business plan. You’ll want to know the current business owner’s goals and how they plan on going about achieving those goals. If they’ve not been able to formulate a coherent business plan then that could be a red flag.
You need to see how a business can be grown in the future, and that means you need a business plan. Additionally, a business plan will outline how products and services are marketed and how the business compares to other companies.
How is Overall Performance?
A key question to have answered before signing on the bottom line is “How well is a business performing overall?” Wrapped up in this question are factors such as how many hours the owner has to work, whether or not a manager is used to oversee operations, how many employees are paid overtime, whether or not employees are living up to their potential and other factors. Answering these questions will give you a better idea of what to expect if you buy the business.
What Do the Financials Look Like?
Clearly, it is essential to understand the financials of the business. You’ll want to see everything from profit and loss statements and balance sheets to income tax returns and more. In short, don’t leave any rock unturned. Importantly, if you are not provided accurate financial information don’t hesitate, run the other way!
What are the Demographics?
Understanding your prospective customers is essential to understanding your business. If the current owner doesn’t understand the business, that is a key problem. It should be clear who the customers are, why they keep coming back and how you can potentially add and retain current customers in the future. After all, at the end of the day, the customer is what your business is all about.
Don’t rush into buying a business. Instead, carefully evaluate every aspect of the business and how owning the business will impact both your life and your long-term financial prospects.Read More
By Peter Siegal, Founder & Senior Advisor at BizBen.com
What’s the difference between a business opportunity and a going business for sale? They are NOT the same thing.
A business opportunity refers to all opportunities for those in the market to buy and own their own small business. But it’s not the same thing as a going business for sale.
These are five characteristics that distinguish a business opportunity an existing retail, service, restaurant or other kind of business that is for sale.
1. Customer, Employees, Location: An ongoing business will come with existing customers, employees, a known name and usually a distinct location. A business opportunity is an idea for providing products or services, and some of the methods and resources needed to implement the idea. Some business opportunities are meant to be operated from the buyer’s home or other facility obtained by the buyer.
Examples of business opportunities are service businesses such as placing and servicing vending machines, billing and related services for professionals, assembling finished products from parts provided, and selling products in a direct marketing system.
2. Established Track Record: An ongoing business has an operational history –producing revenues and earnings for the owner, and establishing and building relationships with customers and suppliers. A business opportunity will be a new business so it has no track record. If the buyer wants to know if the sales, earnings and other projections made by the seller are likely to be realized once the business is started, they should understand this difference.
3. Risk. Many buyers believe a business opportunity is a riskier investment because there is no proof will be successful in the territory or region where it is being offered. By contrast, a going business has a known operating track record.
4. Cost: A business opportunity can usually be obtained for less money than buying an existing business. But a business opportunity may require additional cash to operate. You might have to purchase inventory, equipment, fixtures or other assets to operate the business. You might also have to pay for “soft” assets, such as training and trade name. By contrast, the business serving customers for awhile will usually cost more a buyer would be required to purchase goodwill–also called “going business value,” and often a covenant not to compete.
5. FTC Regulations: The Federal Government has little reason to get involved in the way an existing business is offered and sold, unless the business that requires Federal licensing. The Federal Trade Commission has established rules for the way a business opportunity can be sold. FTC requires sellers to provide interested buyers with a disclosure statement seven days before that buyer can sign a contract or hand any money over to the seller of the opportunity. Included in the disclosure are names and contact information for other investors who have purchased the opportunity being offered. The government got involved after buyers complained about business opportunities sold with false or misleading information.
So, a buyer of a business opportunity must complete the due diligence process takes place before there is any agreement for purchase. When you buy an ongoing business, you complete that process after buyer and seller have agreed on price and terms. That contract includes the provision allowing the buyer the right to analyze and learn more about the business–to make sure the company operates and performs as represented. Due diligence must be completed before the contingency is removed and the transaction can close.
When considering the purchase of a business opportunity, a buyer should call on other buyers of that opportunity and learn their experience. And conduct other common sense methods of investigation before signing on the dotted line.
About: Peter Siegel, MBA is the Founder & Senior Advisor (ProBuy & ProSell Programs) at BizBen.com, where this post originally appeared. he works with business buyers, owners/sellers, intermediaries, agents, investors, and advisors).Read More
The business sale process can be complex, which is why it’s best to have expert help from a business broker. Brokers can help you avoid costly legal mistakes which can bring the entire sale process to a sudden and complete halt. Let’s take a closer look at what you can do to avoid these kinds of issues when selling your business.
Major Mistake 1 – You Skipped the Non-Disclosure Agreement
Nothing quite invites trouble like skipping the non-disclosure agreement. If a deal falls through, then you have the NDA backing you up. This document ensures that the prospective buyer doesn’t tell the world that your business is up for sale. Never assume that a deal is going through until it actually is 100% complete. There is plenty of room for things to go wrong when buying or selling a business, and that is why you always need to have an NDA in place.
Major Mistake 2 – You Don’t Work with an Attorney
Let’s be very blunt here, if you are selling a business, then you need an attorney. Just as there is no replacement for an NDA, the same holds true for working with a lawyer. It is also vital that you properly prep your business for sale, which means getting paperwork organized and making sure that you have legally checked all your boxes. Working with an experienced and proven attorney will help you ensure that your business is ready for sale. If you’re not prepared for the deal, it can make buyers nervous. Business brokers can recommend attorneys who are familiar with the purchase and sale of businesses in your state.
Major Mistake 3 – You Failed to Get a Letter of Intent
A letter of intent is a vital legal document. Some sellers are reluctant to use it, fearing that it will slow down the momentum of the deal. However this letter works to protect your interest and outlines expectations, so this step should not be skipped. For example, a letter of intent details the termination fee for the buyer, meaning that the buyer can’t walk away without consequences simply because he or she is having a bad day. Importantly, a letter of intent ensures that you are only dealing with serious buyers instead of wasting your time with window shoppers.
Many things can go wrong while selling a business. The more prepared you are before you begin the process, the greater the chances that you will not only avoid headaches, but also be successful. Long before you put your business on the market, you should begin working with a capable business broker and attorney. Their input and advice will prove to be invaluable and help you avoid a range of costly and time-consuming issues.Read More
When it comes to buying a business, nothing is more important than the factor of due diligence. For most people, this investment is the single largest financial decision that they will ever make. And with this important fact in mind, you’ll want to leave absolutely no stone unturned.
Let’s examine the three most commonly overlooked areas when it comes to buying a business: retirement plans, 1099’s and W-2’s, and legal documents.
1. Examine All Legal Documents
While it may sound like a “pain” to investigate all the legal documents relating to a business that you are vetting for purchase, that is exactly what you have to do. The very last thing you want is to buy a business only to have the corporate veil pierced. “Piercing the corporate veil” refers to a situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts. Everything from trademarks and copyrights to other areas of intellectual property should be carefully examined. You should be quite sure that you receive copies of everything from consulting agreements to documentation on intellectual property. Your business broker can recommend attorneys who are familiar with legal issues involving the purchase of a business.
2. Retirement Plans
Forgetting about retirement plans when you’re buying a business is a mistake can quietly translate into disaster. Before signing on the dotted line and taking ownership, be sure that both the business’s qualified and non-qualified retirement plans are 100% up to date with the Department of Labor and ready to go.
3. W-2’s and 1099’s
If 1099 forms were given out instead of W-2’s, you’ll want to know about that and be certain that it was done within the bounds of IRS rules. Imagine for a moment that you fail to do your due diligence, buy a business and then discover that you have problems with the IRS. No one wants IRS problems, but a failure to perform due diligence can quickly result in just that. So do your homework!
There can be many skeletons hiding in a business, and you want to be sure that you protect yourself from any unwanted surprises. One exceptional way to protect yourself is to work with a business broker. A business broker knows what to look for when buying a business and what kinds of documents should be examined. There is no replacement for the expertise and experience that a business broker brings to the table.Read More