Software of the Month Club 1996 May/Software of the Month Club 1996 May.iso/mac/ISO9660/ZIPFILES/SBA962.ZIP/F257.SBE

Text File | 1996-02-15 | 7.6 KB | 178 lines

@126 CHAP 3

       ┌─────────────────────────────────────────────────┐
       │SUMMARY CHECKLIST FOR BUYING AN EXISTING BUSINESS│
       └─────────────────────────────────────────────────┘

INVESTIGATION:

    . Why does the present owner want to sell the business?

    . Will the reputation of the business be helpful or
      harmful if you take it over?

    . Obtain tax returns, bank deposit records, sales tax
      returns, and other financial records.  Don't buy a
      "pig in a poke."

    . If the business is not currently very profitable,
      why do you think you can run it more profitably than
      the present owner?

    . Thoroughly investigate the business's financial re-
      cords and history, its reputation and any factors
      that might unfavorably impact on its future.  You
      may need the help of an accountant or other experts.

    . Review or have reviewed the provisions of key con-
      tracts, leases, franchise agreements, or any other
      legal arrangements which have a significant effect
      on the business.  Be sure you are not assuming an
      unfavorable lease or contract or losing the benefits
      of a favorable one.

    . If the purchase involves real estate, make an in-
      vestigation as to the possible existence of hazardous
      waste contamination of the property, for which you
      might be held liable for astronomical cleanup costs.
      You may even need to hire a firm to do an "environ-
      mental audit" of the property, to protect yourself.

NEGOTIATIONS:

    . Make sure that the purchase price is fair (to you,
      at least).  Even if it is, can you afford it?  Will
      you have enough working capital to run the business
      properly after you pay the purchase price?

    . Insist early on getting accurate financial informa-
      tion and access to the supporting data.

    . Push for an allocation of the purchase price to spe-
      cific assets in the sale agreement.  Be aware that
      you and the seller will each have to file a special
      income tax form (Form 8594) with the IRS, showing
      how the purchase price was allocated.  So seek to
      maximize the amounts allocable to depreciable assets
      and amortizable assets such as a non-competition
      covenant, or "goodwill"; seek to minimize allocations
      to land or other non-depreciable, non-amortizable
      assets that you have purchased.  The 1993 tax law
      changes now generally allow 15-year amortization of
      intangible assets acquired in a business purchase,
      including goodwill, "going-concern value," and a
      number of other intangible assets that previously
      could not be amortized, or which often could only be
      amortized after a lengthy court battle with the IRS.


CLOSING THE TRANSACTION:

    . Retain an attorney to participate in drawing up the
      sale agreement.  DON'T TRY TO "WING IT" ON THIS ONE!
@CODE: AL AZ CA DE DC GA HI IN MD MA MI MO NJ NY NC OH OK RI SC TN UT VA WS

    . Comply with the requirements of the state Bulk Trans-
      fer Act if it applies to the particular type of busi-
      ness being acquired, under @STATE law.
@CODE:OF

    . Be sure the acquired property is not subject to any
      recorded security interests or other liens beyond
      those disclosed by the seller.

    . Have the seller obtain and furnish a certification
      that all employment taxes due have been paid.

    . Have the seller obtain and furnish a certification
      that all sales and use or gross receipts taxes due
      have been paid (in states where such taxes are ap-
      plicable to the seller's business).

    . Seek to hold back part of the purchase price as se-
      curity to indemnify you for any misrepresentations
      as to assets or liabilities by the seller.

    . Obtain representations by the seller that any real
      property involved in the sale is not contaminated by
      hazardous substances that might result in Superfund
      cleanup liability, and have the seller agree to in-
      demnify if such substances are later found.

OTHER TAX CONSIDERATIONS:

    . Determine if the sale of the business will result in
      a sales tax liability with respect to part or all of
      the purchase price.  (In many states, such a sale
      may be exempt from sales tax as an "occasional sale.")
@CODE: CA
      In California, the sale of a business is often taxa-
      ble, however, with regard to certain tangible assets.
@CODE:OF
      If the sale will be taxable, is there a way to re-
      shape the transaction to reduce or avoid sales tax?
      For example, allocate more of the purchase price to
      assets not subject to sales tax, less to assets that
      are.

    . Remember that recent changes in the tax law require
      both the buyer and seller in such a transaction to
      file Forms 8594 reporting certain information about
      the sale price and allocation.  Be sure that you and
      the seller are going to report the SAME numbers on
      the two forms you and the seller file, respectively.
      Also, don't forget to file your Form 8594 regarding
      the transaction....THE PENALTIES FOR NON-FILING CAN
      BE STUPEFYING, HORRENDOUS, OUTLANDISH... (although
      we understand that the IRS has not yet begun enfor-
      cing the Draconian penalties the law imposes for
      failure to file this form).

    . If you are buying a corporation that has not been
      paying income taxes because it has carryovers of net
      operating losses or investment tax credits, be aware
      that you will be able to use only a small portion of
      those carryovers to shelter the income of the busi-
      ness once you become the owner.  After 1985, in gen-
      eral, if there is more than a 50% change in the owner-
      ship of the stock of a corporation that has tax loss
      or tax credit carryovers, only a certain amount of
      those carryovers, equal to the yield on long-term tax-
      exempt bonds (about 6 or 7% in recent years), multi-
      plied times the value of the "loss" corporation at
      the time of the acquisition, may be used each year
      to offset taxable income for all tax years ending
      after the change in ownership.

    . If the seller has a favorable "experience rating" for
      unemployment tax purposes, make sure you act on a
      timely basis after the purchase to succeed to that
      rating as a successor employer, under the state unem-
      ployment tax law of @STATE.
@CODE: CA
@CODE:NF

    . In California, make the application to succeed to
      the seller's unemployment tax experience rating on
      E.D.D. Form DE 4453.

    . In California, have the seller obtain an employment
      tax release, (Form DE 2220) from the California
      Employment Development Dept., certifying that all
      employment taxes due have been paid by the seller
      (so you won't become liable for them).  The seller
      should also obtain a sales tax release or "Certifi-
      cate of No Tax Due" from the State Board of Equal-
      ization.

    . California also requires that, if you purchase a
      business that owns real property within the state,
      you must report the change of ownership to the
      county tax assessor(s) on a timely basis.  As a
      result, your real estate taxes may be much higher
      than the seller's, when the property is re-assessed
      at its higher current value, rather than the Propo-
      sition 13 assessed value upon which the seller's
      tax was based.