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Ten things you need to consider before buying an existing business

Ten things you need to consider before buying an existing restaurant

Buy an existing restaurant in Florida

While it is a financially smart idea to buy an existing restaurant in Florida, turning it around will take experience, help, and patience. The advantage of purchasing an existing business is that you won’t start from scratch. This will have taken you almost halfway through the journey to being a successful entrepreneur. It is estimated that in every year over half a million business change hands; the number is expected to soil since more and more people are willing to sell their businesses due to hard financial times being experienced. Below are ten things that you should consider before buying a business.

Know your employees

Before signing that purchase document, always know your employees. Make sure they are willing to stick around once you buy it. Why? Well, your employees are usually there most of the time, and during that period they have built a good rapport with your customers, so you need them around. Most sellers never notify their employees that they are selling the restaurant, so be sure to include a clause stipulating that the seller has to inform the employees of the purchase within 48 hours of closing. It should consist of another term that requires the buyer to meet up with the employees and weigh their suitability to continue working there after the sale. Lastly, include another provision that allows you to walk away from the purchase in case you are not satisfied with the particular restaurant.

Sales taxes and payrolls

Each state has a specific set of rules and if you decide to buy a business’s assets, inquire if he owes sales taxes or payroll taxes. In case he has employees ask whether he is current on his employment taxes – if he is up to date, then as the state’s tax body to issue you with a clearance letter. Failure to this the state can come for you if they discovered that you are behind in your taxes.

Negotiate a letter of intent

This is a letter that stipulates all necessary agreements, usually a two to a three-page document. In this letter, you should include the purchase price, when and how you pay the price. Also, it should include the assets your seller wishes to keep and those he hopes to sell. Letters of intent are not fully binding but filling in all the technical agreements is important, this is because they will serve as drafts that lawyers will use when typing a purchase and sales agreement for the restaurant.

Buy the assets and not the restaurant

In case the seller is an LLC or a corporation, don’t buy the stocks, instead buy the assets. Why? The first reason is that in case he is being sued or has debts you will be covered from those legal responsibilities. Lastly, you will have a friendly tax treatment because your tax will be based on what you bought the assets for and not what your seller paid.

Understand why the restaurant is for sale

When you want to buy an existing restaurant, it is crucial to understand why the restaurant is up for sale. Though, it is a bit skeptical to inquire why but it should be a red sign when a seller fails to give a compelling reason as to why his business is for sale. This is because most people have been through gruesome battles to keep their businesses afloat. They are emotionally connected, so it is only fair to understand why? Additionally, ask neighbors and employees, if their answers conflict then that’s a red sign.

Do you have an exit strategy?

This should be a factor that you should have in mind before signing a purchase agreement. The world of business is brutal and before making it through you will have to keep digging in your pocket. Due to unforeseen circumstances sometimes, you can’t make it through, so always have an exit strategy, and if your business has some partners make sure you have a buy and sell agreement in place.

Restaurant contracts and leases

The fun part of when you buy an existing restaurant is that it comes with all documents. It is important though to keep an eye on the business contracts and leases. For instance, if over 80% of your revenues come from one client, think twice, what would happen if he walked out?

Agree on an indemnity with the seller

Even if you hired great business advisors, sometimes things slip up, and you may end up being sued for something your seller did. It is prudent to ask for an indemnity from the seller, where he promises to pay all legal fees and defend the suit in case of such a scenario. Furthermore, in case you should also give your seller an indemnity in case you get sued after the close of the restaurant.

Conclusion

When you buy an existing restaurant it will save you time and heartache, but before buying what should, you consider? It is important to know why the restaurant is up for sale. This will allow you to plan for any skeletons that you had not foreseen.

Buy an Existing Restaurant

Benefits of a Special Purpose Entity

Benefits of Special Purpose Entities for Businesses

When buying a business in Florida, the use of a Special Purpose Entity (SPE) can help you leverage your buying power. A business buyer may need to only come up with 5-10% of the purchase price of the business. In addition to this, an SPE has several benefits for business owners.

Special Purpose Entity Provides Asset Protection

The core of any successful business is its ongoing operations including its manufacturing of goods or provision of services to its customers, its financial dealings with lenders and suppliers and its marketing to prospective customers. The biggest potential for legal liability suits that a business encounters is typically associated with its core business. Lawsuits are most likely to arise out of financial transactions or from business interaction with third parties such as customers, clients or suppliers.

Loss of Core Business Assets

A successful business owner can find new customers and can change suppliers and finance companies but, a business cannot easily replace its most valuable assets. A business that has its most important assets taken by a judgment creditor will not survive. For instance, a business will have difficulty overcoming a judgment which levies upon assets essential to its core business such as its real estate used for offices, storage, or production, its receivables or the equipment and intellectual property the business uses to produce services or products. Core business assets are essential to the survival of small businesses.

Core business assets are vulnerable if they are owned and operated by the same legal entity because a judgment against that business entity will threaten the core assets and thereby jeopardize business operations. Business asset protection starts by separating the ownership of core business assets from core business operations which are susceptible to lawsuits. A core operating business can use essential core assets even if the legal titles to the same assets are owned in the name of a different legal entity such as a different LLC or corporation.

Purpose of SPE

The entities which own business assets are often referred to as “special purpose entities.” Their special purpose is to own, hold and maintain assets that are essential to an operating business. A special purpose entity can have legal title to real estate, intellectual property, equipment or even accounts receivable. The SPE may lease or license its assets to the core business, and the core business pays the SPE for asset use in periodic payments of rent or license fees at market value. These lease or license payments are tax deductible by the core business entity and are income to the SPE. A judgment against the core operating business should not endanger the assets owned by these special purpose entities.

The Business Plan

To be effective, a business plan needs to separate business assets from core business early in its business history and prior to any threat of litigation. A business’s assignment of its assets to a separate entity can be attacked as a fraudulent transfer if it appears that the business planning was undertaken primarily to place the business assets outside the reach of creditors. Also, Transfers of assets from a core business to an SPE after a business has grown may accelerate taxation of income. The transfer of an asset to an SPE will be treated as a sale of the asset for tax purposes. If the business has depreciated the asset, or if the asset has appreciated in value (such as land) then the transfer to an SPE may accelerate taxation of the amount by which the asset’s value at time of transfer exceeds its adjusted tax basis.

Assets Special Purpose Entities Should Own

Real Estate:

Many small business owners also own commercial real estate which the business uses as offices or warehouses. A judgment against the business will immediately and automatically become a lien on business real estate. A business should set up an SPE such as an LLC or partnership to take legal title to business real estate at the time of purchase. The business then will lease the building from the SPE, and the SPE will flow through to the individual business owners depreciation and other tax losses associated with the real estate.

Intellectual Property:

Small business owners often underestimate the value of their intellectual property including trademarks, copyrights and patents. A business’s intellectual property may have little value to a third party or creditor, but the same intellectual property is essential to the debtor’s business. The debtor’s business could be forced to shut down if an unfriendly judgment creditor levied upon essential patents, trademarks or other intangible property.

A business asset protection plan should title all intellectual property in a SPE and have the SPE license the use of the property to the core business. There should be a written licensing agreement and monthly payments close to fair value. The license agreement must contain customized asset protection provisions. If a creditor obtains a judgment against the core business the owners probably can reorganize their business and enter into a new licensing agreement with the SPE.

Cash:

Business owners tend to warehouse large amounts of cash in business checking accounts. A judgment creditor will move quickly to garnish all business financial accounts. Bank garnishments are the easiest and fasted way for a creditor to execute a money judgment. A business concerned about a potential lawsuit should keep just enough cash on hand to pay immediate obligations such as employee salaries and vendor payments. Surplus cash can be distributed to the business owners in the normal course of business. It is important to demonstrate a history of distributed profits to owners because there will be fraudulent transfer issues if a business makes a one time distribution to owners of a large amount of accumulated business cash in the face of litigation.

Alternatively, if a business needs to retain cash surplus the business should not hold the cash at the same bank where it maintains its operating accounts. A judgment creditor will usually know the debtor business’s primary bank from which the business writes most checks, and the creditor will quickly garnish all accounts at that bank. Creditors will not immediately know about business accounts at different banks, or even in different states, that hold business cash not used for deposit or checking in the normal course of business. However, a judgment creditor will eventually discovery all cash accounts through post-judgment discovery.  Additionally, there are some banks that are very difficult to garnish under applicable law even if the creditor knows of accounts at such banks.

Resource: Alperlaw.com