For some aspiring entrepreneurs, buying an existing business may be preferable to starting a new business from the ground up. Buying a business offers the advantage of an established brand and customer base, an existing income stream, and the opportunity to jump directly into business operations. It can be a risky process, though, so an understanding of the risks and potential pitfalls of buying a business is essential. Our experience as business attorneys has shown us many important issues for a prospective buyer to consider. Here are three of them:
Determining a Sales Price
A business’ sales price is based on a wide array of factors that are unique to each business. In simple accounting terms, the value of a business’ total assets, minus its total liabilities, is its net worth. Assets like equipment and accounts receivable are usually offset by liabilities such as outstanding debt on a capital asset. Every business should maintain an accounting of its assets and liabilities to establish net worth, but a sales price may also reflect intangible factors like business goodwill and intellectual property.
Annual profits play a major role in establishing a sales price, as well as expected profitability. A business may have liabilities peculiar to its market or location, or it may have particular legal obligations based on environmental or other types of regulations. A seller must disclose any unusual liabilities, as they can significantly impact the value, and even the viability, of a business.
Taking Over the Lease
Despite the rise of internet- and home-based jobs, most businesses still require a “brick and mortar” location. Unless a business owns the land or building where it operates, it must lease commercial space. Most commercial leases require a landlord’s approval to substitute a new business owner, a process known as assignment of a lease. As a condition of an assignment, a landlord may want documentation of the buyer’s financial responsibility, or some other assurance that the buyer is capable of making rent payments without interruption. Obtaining a properly-executed lease assignment is critical for a prospective business owner, since a failure to do so could constitute a breach of the seller’s lease agreement. This could then entitle the landlord to evict the business.
Trademarks and Other Intellectual Property
Every business relies on a brand name or trade name to distinguish itself from its competitors. The strength of a brand, and the goodwill it engenders, might be a key part of a business’ attractiveness to a buyer. A buyer must therefore make certain, when negotiating the terms of a purchase, that all rights to a business’ name, logo, promotional campaigns or materials, and any slogans or mottos are included among the assets. If a business has registered trademarks or copyrights with the government for any of its intellectual property, a buyer will need to obtain a transfer of rights from the seller to ensure the right of continued use. A seller should also disclose any other people or businesses who may have or claim rights in any intellectual property used by the business.
The business attorneys at Samuel C. Berger, PC offer fixed-fee packages of legal services to businesses and entrepreneurs who want to do business in New York and northern New Jersey. To speak to a member of our skilled legal team, contact us today online or at (212) 380-8117.
New York Tax Court Rules that Business is Liable for Full Sales Tax Bill after Transfer of Business Assets, New York & New Jersey Business Lawyer Blog, August 30, 2012
Five Common Mistakes New York and New Jersey Startup Businesses Make, New York & New Jersey Business Lawyer Blog, July 12, 2012
Small Business Owners in New York City Report Optimism Going into 2012, New York & New Jersey Business Lawyer Blog, January 26, 2012
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