Many entrepreneurs go into business for themselves by deciding what type of business they wish to start and then starting their business by doing all of the “leg work” for the business on their own. These self-starters generally enjoy not only engaging in the business they choose, but being involved in the process to create that business from the ground up. Others, however, for a variety of reasons, choose to purchase an on-going business after someone else has done all of the startup work.

Before buying any business, however, there are certain things one must do to ensure their investment actually results in the purchase of a profitable (or at least potentially profitable) business. To start, one must, at a minimum:

• Decide what type of business they wish to operate. This including taking an honest assessment of the talents, skills and experience the entrepreneur possesses, as well as deciding what type of business the entrepreneur does not wish to operate.
• Identify the sources of funds available. Does the entrepreneur have sufficient funds with which to purchase the type of business chosen, or do they need to obtain a loan?
• Decide on a location from which the entrepreneur wishes to do business.
• Decide on the legal structure of the business. Does the entrepreneur wish to conduct business as a sole proprietorship, partnership, limited liability company or corporation (this decision may determine which businesses the entrepreneur may wish to purchase).

Once these decisions have been made, a source of financing has been secured and the entrepreneur has located a business that is being sold, a thorough investigation of that business must be undertaken. Generally, a letter of intent, or some other offer document, will be sent to the current owner of the business setting forth the buyer’s interest to purchase the business including the proposed purchase price and the proposed terms for purchase. Included with the letter of intent, a proposed confidentiality agreement will be needed to assure the seller that the potential purchaser will not disclose any information gleaned from the initial negotiations and due diligence will be shown to any third party.

In order to ensure that the entrepreneur will actually receive value for his or her investment, the seller must provide the following documents, which should be carefully scrutinized by the potential buyer or their representatives:

• Copies of all leases to which the business (or its current owner) are parties. Understand that if a lease exists for the existing location of the business, the potential purchaser will likely be required to work with the landlord in order to assume the existing lease.
• Copies of all contracts to which the business (or its current owner) are parties. Like leases, the potential buyer may be required to work with existing vendors and others to assume existing contracts.
• Copies of all financial statements of the business for the past five years, together with audit letters from a reputable Certified Public Accountant. Potential buyers should never simply rely on financial statements prepared, but unaudited, by a business.
• Copies of the tax returns filed by the business for the past five years.
• If the business is a corporation, the minute book of the corporation, which should include an original certified copy of the articles of incorporation, minutes of all regular and special meetings of shareholders and directors, all tax elections and ledgers identifying the shareholders, their names and addresses, and the number of shares owned by each.
• If the business is a franchise, copies of all franchise agreements, renewals, and disclosure documents.

The foregoing is merely a brief overview of what one should consider and obtain prior to purchasing an existing business and by no means includes an exhaustive treatment of what is required.

Each business and business entity is unique. To understand the different options and which direction will be best for your situation, you need to consult with an experienced corporate attorney. Michael Leonard, Esq. of San Diego Corporate Law, named “Best of the Bar” by the San Diego Business Journal in 2016, has the expertise to guide you through everything from forming your business, to creating buy-sell agreements, to executing contracts, and anything in between. To schedule a consultation to discuss any business-related matter, please contact Mr. Leonard by visiting San Diego Corporate Law or by telephone at (858) 483-9200.