Business Buying FAQ's
Name: michelle
Subject: small bus
Question:
I have been looking for a franchise or established business to buy. I have found one which seems a bit overpriced but I think the location has great potential. The seller's net last year was $115K and he's asking $200K. He says he's selling because it's just too much hassle for him but I've done some research and I don't see anything moving into the immediate area. The rent is kind of high and I don't know how long he's got the lease or if it's going up. There isn't very much equipment either. This is my first venture and I could use some advice on valuation and what the most important questions to ask and considerations are.
Answer:
Michelle, buying a business takes a lot of work and help from experts. You did not state your background. I presume you know the fundamentals of the business, but have you studied business? For example, have you taken accounting, business law, marketing and economics? If not, your business runs substantial risk of failure.
First you will need to gather the basic facts so your attorney can help you. A current P&L and at least 3 years of tax returns are the minimum needed financial information. You should have a listing of machinery and equipment as well as a detailed list of ongoing business expenses. Also, a copy of the lease of the building and any machinery is also important.
You should have your tax and business attorney review the documents and make a pro forma analysis of the business. Some of the issues are: can the business pay for the purchase price; what is the breakeven point; how much capital will you need.
I hope this helps you get started on the right track!
Ron Cappuccio
http://www.TaxEsq.com
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Name: Majid
Subject: Strategic guidance
Question: I am managing director of a newly stablished representative company in office machines.
I started my cooperation with the investor 8 months ago. He owned a company in Euroup and intended to set up a branch in the Midle East.
I prepared business plan, expenses estimate, and sales and cashflow forcast. Thereafter everything was approved and the company was started 3 months ago.
Then the problems emerged: prolonged insufficient funding, lack of any technical support dipicts a situation that I feel we are going to have serious problems.
On the other hand my employer insisted on giving me 15% share of the company instead of paying for my services before the time we sent mails to our customers ie the whole 7 months of our coperation.
Moreover after 3 months of full time operation in the company I have not received a single euro.
Please tell me what strategy best serves my benefits regarding that the share of a newly setup limited liability company worths nearly nothing.
Best regards
majid
Answer: Majid:
Frankly, there is no easy answer. It sounds to me like you have the wrong business partner/investor. If you do not trust them, I suggest you run from this business as fast as you can. Further, if you decide to continue with the business, you need to clearly state your expectations as to compensation. Set definite deadlines and insist the budget and financing includes your salary.
I hope this helps!
Ron Cappuccio
http://www.taxesq.com
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Question:
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Category: Tax and Taxation Law
Location: AZ
Subject: Past Due Taxes
In March 2007 we purchased 67% of an existing corporation (the remaining 33% is owned by additional business partners). Under the sales agreement, we included a stipulation that all existing liabilities and IRS issues remain with the previous majority owner. We received a letter from the IRS about past due taxes (under the corporation's EIN which we continued to use when we took over) for liabilties that existed prior to us taking over ownership. When we contacted the IRS we found out that there has been an ongoing case with the previous owner for tens of thousands of dollars owed from 2005 and 2006.
Will the IRS be able to separate our tax liability (which for us is current and paid) from the unpaid amounts of the previous owner under this same EIN?
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Reply:
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Category: Tax and Taxation Law
Location: AZ
Subject: Re: Past Due Taxes
No. When you purchased the STOCK rather than the ASSETS of the business, you inherited all of the liabilities exisiting in the corporation. A good Agreement to Purchase Stock would include representations and warranties where the seller would promise to pay taxes and indemnify you from losses. You may be stuck paying the taxes and attempting to recover from the seller.
I hope this helps!
Ron Cappuccio
http://TaxEsq.com
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Name: Gregory
Subject: Buy in / Buy out
Question:
I have business 500,000 annual sales There is a simalair type biz for sale: 3.5 mil annual sales Nets about 3% - 5% A/R 225,000 current 45,000 over 60days Offer Price: 300,000 Fair?
Need to maintain 4 key people ( father and 3 sons ) to keep sales at the stated level shown on the statements or a penalty sets in. Plus to protect my new venture from them simply starting over under a new name(2-3 years?) Key Question: How can I get him to finance the entire amount? * Price and the A/R's over a 3-4 year period.
My primary concern is of the A/R for the first year or two. Problem here: On average A/R take 8 weeks to collect and A/P MUST be paid weekly (Fridays) with 4 weeks credit period. No grace, ie no terms come Monday morning. I hope I have been clear on what I wish to do. I guess I wish for a loan for x years to paid back by the company's operations, under my control.
Thank you
Gregory.
Answer:
Gregory: I don't know if the price is fair. It is very difficult to get a Seller to finance 100% of the selling price. There is not much incentive for them to sell because they are the ones with all the risk. If the business does not go as planned, you can simply walk away. Secondly, you can require the key employees to stay on as a contingency in the agreement for sale. The Key employees would sign Employment Agreements with a Covenant Against competition at closing.
Concerning the slow payment of receivables, if there is enough profit, you can factor the deal and receive the money up front for a small cost. Gregory, you need a tax and business attorney to help you negotiate and prepare the necessary documents.
I hope this helps!
Ron Cappuccio
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Name: Vijay
Subject: Can 2 directors take away share of the 3rd
Question:
Hi, i wanted to know whether 2 directors can join and take away shares of the 3rd Director. Also is it compulsory for the director to work for the same company.
Answer:
Vijay: The answer is dependent on the terms of the ByLaws of the Corporation, the Buy-Sell Agreement and State Law. No one can answer this in general terms. You need to seek independent counsel (not the lawyer for the Corporation!) to review the documents and provide you with the specific guidance you need.
I hope this helps!
Ron Cappuccio
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Name: Brian
Subject: letter of intent
Question:
As we put together a letter of intent to purchase another business for a client of ours, is Goodwill treated differently than a covenant not to compete in any way? Is one treated as capital gains and the other as ordinary income?
Answer:
Brian: Generally Goodwill and a Covenant Against Competition are treated the same for tax purpose and are IRC Sec. 197 property amortized over 15 years. Nevertheless, depending upon the form of ownership of the business the results will vary.
I hope this helps!
Ron Cappuccio
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Name: TJ Mason
Subject: Wine Distribution
Question: I noticed that you responded to an earlier question concerning wine distribution, so I thought perhaps you could help me. If a Company A contracted with small vineyards throughout the US to produce wine under Company A's label, could it be distributed by Company A as long as the individual vineyard was given credit as being the producer on each bottle? (You may assume that each bottle has the required warnings concerning pregnancy/consumption, etc.)
Is there some master listing of individual state regulations that must be followed for such distribution? Is it too large of a challenge to even consider?
Answer: TJ: Thank you for the question. Alcoholic beverages are controlled (and taxed!) by each state. It is a lot of work to become authorized to sell in all states. That is one of the reasons the producers use distributors. In your case, you are subcontracting the production and bottling. That is permitted as you will be the "manufacturer" or "importer." If you intend to sell directly to the customer, this is not practical. Rather you should have distributors for the products.
If you intend to sell online, there is a lot of controversy surrounding the topic and the propriety of cross state sales. I have clients interested in this, and I believe online sales with local delivery will become commonplace in the near future. This is going to require proper legal structuring of your business, setting up separate entities for some states and ultimately legal representation for various states. This could require substantial capital. I suggest you contact your tax and business lawyer to outline a plan on the best way to proceed.
I hope this helps!
Ron Cappuccio
If you have a question., call
Ronald J. Cappuccio, J.D., LL.M.(Tax)
at
(856) 665-2121
