Interested in Buying a Business? Check Out These 3 Commonly Overlooked Areas
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.
Copyright: Business Brokerage Press, Inc.
Read MoreUGA Small Business Development Experts To Speak Sept. 25
If you own or operate a Georgia business, you can get free confidential consulting services including helping with business plans, buying businesses and leasing space. Find out how on Sept. 25 when two experts with the University of Georgia’s Small Business Development Center speak to the Georgia Association of Business Brokers.
Area Director Jeff Patterson and Business Consultant Aysha Cooper will speak to the GABB at their Sept. 25 monthly meeting. The meeting is free and open to the public and will be held at the Atlanta Realtors Center at 5784 Lake Forrest Dr. NW, Atlanta, GA 30328. The meeting begins at 10:30 a.m., preceded at 9:45 a.m. by a free light breakfast and networking session sponsored by GABB affiliate and board member Kim Eells, Vice President and Business Development Officer of Government Guaranteed Lending for Renasant Bank.
The Small Business Development Center, a Public Service and Outreach Extension of The University of Georgia, is funded in part by the U.S. Small Business Administration (SBA). It provides tools, training and resources to help small businesses grow and succeed. Designated as one of Georgia’s top providers of small business assistance, the SBDC has 17 offices ranging from Rome to Valdosta to serve the needs of Georgia’s business community. Since 1977, the SBDC’s network of partners has helped construct a statewide ecosystem to foster the spirit, support, and success of hundreds of thousands of entrepreneurs and innovators. The University of Georgia Small Business Development Center is nationally accredited by the Association of SBDCs.
Mr. Patterson, an area director with the Small Business Development Center at Georgia State University, has extensive financial industry experience that includes leadership roles in credit administration, commercial lending, operations management, regulatory compliance, and audit administration. His expertise includes loan proposal and business plan preparation, cash flow management, budgeting, and customer satisfaction. He also has brokerage and financial planning training. He has an MBA from Brenau University, was President and Board member of the Bank of Hiawassee, Senior Vice President at Nantahala Bank & Trust and Executive Vice President of United Community Banks. He is the past Lt. Governor and Past President of the Rotary Club, past Local Board Chair of North Georgia Technical College and past Chairman of the Board of the Habersham County Chamber of Commerce.
Ms. Cooper has 20 years of experience either working with small business owners or being a small business owner herself. Prior to joining the SBDC, Ms. Cooper was an advertising representative in the yellow page and radio industry. In 2005, after moving to Georgia, she opened her first business in Duluth, Ga., with the guidance and expertise of the SBDC. She has attended GrowSMART and been a client of the SBDC throughout the start-up and expansion phase of her adult care facility. In 2011, she was recognized by Access to Capital for Entrepreneurs (ACE) Entrepreneur of the Year and in 2017, Outstanding Woman of the Year. Aysha has been an active member of her community as a graduate of Gwinnett Neighborhood Leadership Institute, a board member for Snellville Tourism and Trade and Friends of Gwinnett County Seniors. Her interests include marketing, operations and franchising.
The GABB is an organization of experienced professionals who work with Georgia business owners to help them in the process of evaluating, marketing, financing and selling their businesses. They also work with business buyers including many individuals who have decided not to re-enter corporate America, but want to become their own bosses by purchasing and operating a Georgia business.
For more information about the GABB, contact GABB President Mike Ramatowski at 770-634-0428 or rambizgroup@bellsouth.net call Diane Loupe at 404-374-3990 or email director@gabb.org.
If you are NOT a GABB member, please fill out this form to let us know you’ll be attending the meeting.
Read MoreAll About Qualified Opportunity Funds – New Tax Tool Available To Defer and Possibly Eliminate Gains
Effective January 1, 2018 the Tax Cuts and Jobs Act established Federal Qualified Opportunity Zones (QOZs) with the goal of allowing large amounts of capital to flow into economically distressed area across the country. To promote capital investment in these Qualified Opportunity Zones, legislators included three favorable tax provisions that benefit qualifying taxpayers. First, the ability to defer paying tax on capital gains until December 31, 2026. Second, basis increases which reduce deferred gains and lower the eventual capital gain tax to be paid by December 31, 2026 on deferred gains. Third, zero tax on new capital gains derived from capital appreciation in Qualified Opportunity Fund (QOF) investments held for at least 10 years.
Wait, what are Qualified Opportunity Zones?
The new tax law authorized the creation of Qualified Opportunity Zones (QOZ) which are defined as census tracts in low income communities and specifically designated as QOZs. The QOZs, now finalized by Treasury, were identified and nominated by the governor of each state or territory in which the zone is located. Governors were directed to select zones that were the focus of economic development and areas which had recently experienced significant layoffs due to business closures and relocations.
The Treasury Department has already reviewed and approved the list of opportunity zones. To view Federal Qualified Opportunity Zones visit this link, and follow the direction for using the map.
How Qualified Opportunity Funds (QOFs) Correspond to Qualified Opportunity Zones (QOZs)
A Qualified Opportunity Fund (QOF) is an investment vehicle created for investing in eligible property located in a Qualified Opportunity Zone. Investments in these funds provide for the three tax benefits listed in the first paragraph of this article. To qualify as a Qualified Opportunity Fund, 90% of the assets held by the Fund must be Qualified Opportunity Zone Property (QOZ Property). QOZ Property is property that was acquired after December 31, 2017 located in a Qualified Opportunity Zone, and is described in more detail below.
One of the largest opportunities that our firm sees with these types of investments pertain to investments in existing real estate needing significant improvements, new real estate development projects located in Qualified Opportunity Zones, and investments in businesses requiring significant amounts of tangible assets to operate. However, the details of all the types of property that qualify are summarized here as well. QOZ Property is defined as Qualified Opportunity Zone Stock (QOZ Stock), Qualified Opportunity Zone Partnership Interest (QOZ Partnership Interest), or Qualified Opportunity Zone Business Property (QOZ Business Property).
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- Qualified Opportunity Zone Stock: The QOF can buy stock of almost any business except for “sin” business such as tanning salons, liquor stores, adult entertainment, casinos, racetracks, etc. The stock must be acquired after 12.31.17 at its original issue in exchange for cash; at the time the corporation was formed the business was a QOZ Business (defined below) or for a new corporation, it was formed to be a QOZ Business; and during substantially all of the QOF’s holding period of the stock, the corporation was a QOZ Business.
- Qualified Opportunity Zone Partnership Interest: A QOF can invest in a partnership capital or profits interest which meets the following requirements: 1) the interest is acquired by the Qualified Opportunity Fund after December 31, 2017, from the partnership, solely in exchange for cash; at the time the interest was acquired, the partnership, was a QOZ Business (defined below) or for a new partnership, it was formed for purposes of being a QOZ Business; and during substantially all the QOFs holding period of the interest, the partnership was a QOZ Business.
- Qualified Opportunity Zone Business Property: this property is tangible property used in a trade or business of the Qualified Opportunity Fund (QOF) and meets all of the following requirements: the property was acquired by the QOF by purchase from an unrelated party in accordance with Section 179(d)(2); the original use of the property located in the Qualified Opportunity Zone begins with the QOF or the QOF substantially improves the property; and the business is not a private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises (“sin” businesses). Substantial improvement of a property is defined as occurring if the original basis of the property at its date of acquisition is at least doubled over a 30 month period beginning on the date of acquisition. For example, if a QOF purchased existing real estate located in a Qualified Opportunity Zone, it must substantially improve (defined as doubling the cost basis of the property over 30 months) for the property be qualified.
As mentioned in “1” and “2” above, QOZ Stock and QOZ Partnership Interests must relate to Qualified Opportunity Fund Businesses (QOZ Business). A QOZ Business is a trade or business that meets the following requirements
- At least 50% of the total gross income of the QOZ Business is derived from an active trade or business;
- A substantial portion of any intangible property is used in an active trade or business;
- Less than 5% of the average of the aggregate unadjusted bases of the property of the entity is attributable to nonqualified financial property (debt, stock, partnership interests, options, forward or futures contracts, notional principal contracts, annuities, etc.), and the business is not a “sin” business (mentioned above).
Tax Reporting as a Qualified Opportunity Fund
A taxpayer can designate its entity as a Qualified Opportunity Fund (QOF) via a one page self-certification Form still in process of being drafted by the IRS and attaching this to their tax return. A Qualified Opportunity Fund will file the typical Corporate or Partnership business tax returns, but must meet certain testing hurdles several times throughout the year to insure compliance with the 90% of assets held in Qualified Opportunity Zone Property is met. Failure to maintain a 90% investment in Qualified Opportunity Zone assets will result in a tax penalty to the fund equal to the shortfall under 90% times the existing IRS Underpayment Rate.
Now, why should you care about all of this – what’s in it for taxpayers?
There are three tax benefits available depending on how long an investor holds the QOF interest. In considering the below, remember that investors do not need to live or work in the Qualified Opportunity Zone to gain tax benefits from the investment.
- Tax Deferral until December 31, 2026
An investor who has or is about to realize capital gains from an investment (stocks, real estate, sale of a business, etc.) can elect to invest the amount of that gain into a QOF and the capital gain will be deferred until the earlier of two dates: when the interest in the QOF is sold or Dec. 31, 2026. The taxpayer has 180 days from the date of sale to roll the gain into a QOF and a “qualified intermediary” is not required to hold the capital during that time. In addition, unlike “like-kind exchange”, only gain need be invested in a QOF – not the original principal. - Tax Reduction on Deferred Amounts (basis increases)
A taxpayer’s initial investment in a QOF will have zero basis since gain is being deferred into the fund. If a taxpayer holds the QOF investment at least 5 years before December 31, 2026 the investor receives a 10% step up in basis on the amount deferred. If held for 7 years before December 31, 2026 an additional 5% step up in basis is received. For example, if you had 2018 gains of $100,000 that you invested in a QOF and held the investment for 5 years before disposition the gain you would pay tax on when sold would only be $90,000 as you would receive a $10,000 basis step up (10%) for holding the asset at least 5 years. If you held it another two years, for a total of 7 years before disposition, you would only pay tax on $85,000 of the original deferred gain. Please note, to receive the full 15% step up for holding property for 7 years the QOF investment must be made by December 31, 2019 as gains can only be deferred until December 31, 2026 no matter which year your investment was made. - Zero Tax on New Capital Gains
If the investor holds its’ interest in the QOF for 10 years there is no resulting tax on new gains derived inside of the QOF because the taxpayer receives a basis step up equal to the fair market value when sold. For example, suppose you had a $1,000,000 long term capital gain on the sale of Amazon stock in 2018 and elected to defer that gain until December 31, 2026 by investing all $1 Million into the XYZ Qualified Opportunity Fund in 2018. Further, suppose your original $1 million investment into the XYZ Qualified Opportunity Fund grew to $3.5 Million by December 31, 2028 at which time you disposed of your investment in the XYZ Qualified Opportunity Fund for $3.5 Million. Your additional $2.5 Million of gain ($3.5 Million – $1 Million) derived from the increase in value in the XYZ Qualified Opportunity Fund is tax free due to a 100% basis step up in that amount. Please note, on December 31, 2026 the original deferred gain would have been triggered resulting in your paying tax on $850,000 of your original $1 Million of deferred gain (15% basis step up for holding in the QOF 7 years).
How Can Frazier & Deeter Help?
Involve Frazier & Deeter early in either your decision to create a Qualified Opportunity Fund or in your decision to defer gains by investing in a Qualified Opportunity Fund. The IRS is still in the process of issuing Regulations regarding this new area of tax law. We have contacts throughout the industry, including contacts with different Opportunity Funds, and attorneys who can help create and structure these funds. As CPAs, we are simply facilitators and advisors and are not influenced by any sort of commission. If you have questions regarding Qualified Opportunity Fund creation or investment or both or need help with any other tax planning strategies or tools feel free to give me a call at 404.573.4336 or email me at Andrew.Moore@FrazierDeeter.com.
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Buying a Business That Isn’t For Sale
By Peter Siegel
If you want to become your own boss, but are having trouble finding the right business to buy, there’s another option. Find an enterprise to buy that appealed to him, but was not openly being offered for sale.
Peter Siegel, the Founder & Senior Advisor at California’s BizBen.com, described the experience of Steve, who was retiring from his accounting job and wanting to leverage his retirement savings into an income so that he and his wife could maintain their standard of living.
He decided to buy a small business but was concerned that responding to ads might take several months to a few years to produce results.
So how DO you buy a business that isn’t openly for sale.
Steve started by looking at the companies with which he did business, which led him to his oil-change franchise. The company looked successful and efficiently run and the owner appeared to be about ten years older than Steve. Those were good signs.
Here’s what Steve did to clinch the deal.
Gather Information on the Business
He learned from the franchisor that there were no other franchises that could be opened or purchased in his immediate area. And he got some basic information about the franchise company’s stores-typical gross sales, basic cost factors as a percent of gross, what the owners expect to earn, and an idea about the rules of thumb used for pricing the businesses. Next, he offered to save the time and trouble for friends and neighbors who needed to have their cars serviced. He would do it for them, always bringing the cars to the company he had targeted, and the car owners would reimburse him afterward for the cost of the oil, filters and service.
Contact the Owner
Then, with the business owner now recognizing him as a good customer (and curious why he showed up so frequently and always with a different car), Steve invited the man to lunch.
After assuring the owner that their discussion would be treated with complete confidentiality, Steve explained what he had in mind and learned that the owner had been thinking about selling, but had been so busy he hadn’t gotten around to doing anything about it. Steve presented document he’d prepared, called his “buyer’s resume.” It listed the money Steve had available, the assets on which he could borrow and it detailed his business experience.
The owner was immediately put at ease. He liked Steve’s professional approach and was impressed that this prospective buyer had done his homework and had some understanding of what was involved in running the company. Clearly, Steve was not there to waste his time.
The two met a few times afterward, and then sat down with their lawyers to start a negotiating and contracting procedure that culminated weeks later, in a successfully completed campaign for Steve, the new owner of the oil-change franchise.
There were buyer candidates who’d put their name on the list for a local franchise with the parent (franchise) company. And there were buyers asking their business brokers if there were any automotive service companies in the area that had been newly listed. In other words, Steve had competition among others who wanted what he wanted. But he wound up with the business.
And the way he went about it can be instructive for anyone wanting to purchase a good company and impatient because nothing appropriate has yet been found.
Prepare a Buyer’s Resume
Steve’s buyer’s resume is a very useful tool, not only to show to brokers and to prospective sellers selling a business who’ve been formally introduced by an intermediary, but also to business owners who are being directly approached about selling. It shows that the prospective buyer is serious, up-front and business like. And it lets the seller know what the buyer can and cannot do-a time saver for everyone involved.
Learning about a business of interest is another way the buyer demonstrates that he or she is being professional. That’s what Steve did by obtaining and studying the franchisor’s literature. And it also saves time, since the prospective seller does not need to go over the basics of the industry. The smart buyer-candidate can discover plenty of information that will help him or her be prepared, by contacting local business groups such as the Better Business Bureau or Chamber of Commerce, the associations representing the business’s industry, and by conducting a key word search on the Internet. And, of course, if the targeted company is a franchise, the interested buyer can find out from the franchisor much of what’s needed to know for initial discussions.
Confidentiality
The smart buyer also is prepared by knowing the importance of exploring this idea with prospective sellers in a way that is private, respecting an owner’s usual need for confidentiality. Even if a business owner is interested in speaking with people who might want to purchase the company, anyone approaching that owner in a way that might expose the topic of conversation to others, is bound to get a negative response. Very few prospective sellers want customers, employees or vendors to learn that they are considering the idea of getting out of the business. If any outsiders hear someone ask a business owner “Do you want to sell?” they most likely will hear this answer: “No.” Even if that’s not the case.
NETWORKING
Steve’s experience makes this process sound easy-a lot easier than it is in most cases. Of course his idea of checking out companies with which he did business is just one of many strategies a buyer can employ to find an appropriate business with a willing seller that isn’t officially for sale. A productive part of the network involves vendors in any industry of interest-people who know all of the owners in the market area for the businesses they sell to.
Furniture, gift and housewares wholesalers may know of customers-owners in the retail end of their business– who seem ready to retire. Commercial washer equipment sales people know all the owners of coin laundries in their territories, and may even want to encourage a less active owner to sell out to someone who may be more involved in the operation, particularly if the new owner is likely to purchase new equipment from that sales person. Similarly, route drivers calling on food and liquor stores have a pretty good idea about what’s going on with their customers. If someone is getting ready to sell out-perhaps because the next generation in the family doesn’t want to take over the business from aging parents-the guy, or gal, who makes deliveries to that business several times a month, is probably pretty well informed about the situation.
Speaking with these people is an excellent way to get tips about an owner who is getting in the mood to sell, before that owner contacts a business broker or posts a for-sale notice. The offer of a finder’s fee to people in a network might encourage them to pass along valuable information about likely sellers in their industry. They might even be willing to arrange the introduction, telling an owner about someone who might be a prospective buyer for the business, if the owner is so inclined.
Part of the network, of course, are the social, community and religious groups in which a buyer is involved. While visiting with other parents at a PTA meeting, or enjoying beers with fellow players on the local amateur soccer team, or chatting in the locker room at the gym or yoga center, a person who wants to find a small business to buy can put that fact into the “grapevine” in hopes the word will reach someone, who knows someone, who is getting ready to sell a good business. And the professionals who advise small business owners-lawyers, accountants and insurance brokers-represent a productive network. These people often are the first to learn when a client is planning a life change that involves selling a business. The buyer wanting to take advantage of this network should make sure to distribute a “buyer’s resume” with a carefully worded cover letter to some of these professionals. Days or weeks later, that information may come out of the counselor’s desk or file drawer to be shown to a client who begins expressing an interest in retiring or moving on to another enterprise.
Hiring a Business Broker
An effective strategy followed by some prospective buyers is to hire a business broker to approach specific business owners, or all business owners in a particular industry and market area. The arrangement between buyer and broker can vary, but usually is based on the understanding that the broker represents the buyer-the reverse of the typical circumstances-and the buyer pays the broker a specified fee-or percentage of the purchase price-upon completion of a successful transaction. Business Brokers will also know of businesses in your area that are for sale.
Once a buyer identifies an interesting business headed by a cooperative seller, and negotiations begin, it is useful if that buyer has planned out the steps that will lead to a completed transaction. What if the seller resists the offered price, expressing the idea that the business might command more money if exposed, through a listing broker, to the full marketplace of potential buyers? One intelligent response to that objection is to remind the seller that dealing here and now, with a ready, willing and able buyer, eliminates both the need for the seller to pay a broker’s commission, and the risk that the seller’s confidentiality will be compromised.
Most buyers are not likely to adopt the strategies suggested here-not when there are many brokers willing to help in the search, and a number of resources that list businesses for sale. But for the more impatient buyers, these comments suggest actions they can take today.
About This Contributor: Peter Siegel, MBAis the Founder & Senior Advisor (ProBuy & ProSell Programs) at BizBen.com (established 1994, 8000+ California businesses for sale, 500 new & refreshed postings/posts daily) works with business buyers, sellers, business brokers, agents). Reach him direct at 866-270-6278 to discuss strategies regarding buying a California business.
Read MoreBiz Chronicle Publisher spoke to GABB Aug. 28
David Rubinger, publisher of the Atlanta Business Chronicle, spoke on Aug. 28 to the state’s largest organization of professionals who broker business sales and purchases, the Georgia Association of Business Brokers.
The GABB meeting, which is free and open to the public, was held at the Atlanta Realtors Center at 5784 Lake Forrest Dr. NW, Atlanta, GA 30328. The monthly meeting was sponsored by GABB affiliate Andrew Moore, CPA, of Frazier and Deeter.
The publisher’s presentation is here. AtlBizChronPPT
The GABB is an organization of professionals who work with Georgia business owners to help them in the process of evaluating, marketing, financing and selling their businesses. They also work with business buyers including many individuals who have decided not to re-enter corporate America, but want to become their own bosses by purchasing and operating a Georgia business.
David Rubinger has spent the past 30 years as both an award-winning journalist and corporate communications executive. Two years ago, he returned to his roots at Atlanta Business Chronicle to become its Market President and Publisher. The Chronicle is one of the largest and most successful business journals in the United States. It is the flagship for American City Business Journals Inc., which has business journals in 43 markets throughout the country.
Mr. Rubinger began his career in Atlanta with Atlanta Business Chronicle in 1989 to cover banking, investment, and real estate industries. He later served as managing editor and editor of the Chronicle until he joined Ketchum Public Relations as its senior vice president in late 1998. In 2003, he was tapped by Equifax to lead the company’s global communications team, and in 2008 struck out on his own to start Rubinger Inc., a boutique corporate communications firm before returning “home” to the Chronicle in 2015.
A native of New York City, Mr. Rubinger is a graduate of Trinity College in Hartford, Conn., where he received a B.A. in government. He is a member of Leadership Atlanta, the Emory University Board of Visitors and Emory’s Center for Ethics. David is on the board of the Metro Atlanta Chamber and the Atlanta Convention and Visitors Bureau. He lives in Ansley Park with his wife, Hedy, who chairs the healthcare practice at law firm Arnall Golden Gregory. They have four children: Jill, who just completed her second year at UVA law school; Scott, who completed his junior year at UT Austin; and Adam and Eric, who are rising 11th graders at the Westminster Schools.
For more information about the GABB, contact GABB President Mike Ramatowski at 770-634-0428 or rambizgroup@bellsouth.net call Diane Loupe at 404-374-3990 or email director@gabb.org.
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