11 Apr What You Buy When You Buy a Business
The vast majority of business purchases we facilitate are defined as “asset” purchases. An asset purchase specifically identifies the assets and liabilities you are purchasing or assuming.
Sometimes business owners own their assets inside a corporation. The owner owns Stock in the corporation, while the corporation owns the assets. A buyer typically forms their own legal entity, such as an LLC or S Corporation, to purchase the assets from the seller’s corporation.
You will typically be purchasing the following types of assets:
- Tangible: Inventory, equipment, machines, vehicles, furniture, computers, fixtures, etc.
- Intangible: Business name, goodwill, customer lists, contracts, non-compete agreements, phone numbers, websites, trained employees, etc
Asking prices normally include all the business’ tangible and intangible business assets, unless identified otherwise.
However, there are some common exclusions, including:
- Cash and cash equivalents on hand and in checking or investment accounts
- Accounts receivable
- Prepaid items and deposits
- Any items in the seller’s corporation or limited liability company that are not used by the business, such as personal cars, vacation homes, etc.
- Business Debt Liabilities, such as accounts payable and all debts, are typically the seller’s responsibility unless stated otherwise
When your transaction is structured as an Asset Purchase, you typically assume the following liabilities :
- Facility Lease: Most buyers want the business to remain in the same location and will want to have the facility lease put in the buyers name.
- Any contracts where the future benefit goes to the buyer, such as an annual advertising contract paid on a monthly basis or orders from customers, obviously the buyer wants to keep those sales.
Often you will also be assuming the business’s equipment leases. Often these agreements include a postage machine or copier lease among others.
With automotive dealerships or repair shops, the list is more specialized and extensive.
The Purchase Agreement will document the assets you are buying, any liabilities you are assuming, and any assets excluded from the sale.
Sometimes the seller also owns the real estate out of which the business operates. Frequently, the real property is held under a separate entity – either a limited liability company or a corporation – than that of the business. The business pays rent to this second entity. This structure is often done for tax or other purposes.
In such a scenario where a buyer is buying the business and the real property, the buyer and seller’s legal representatives negotiate a separate agreement for the conveyance of the real property.