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@126 CHAP 3
┌─────────────────────────────────────────────────┐
│SUMMARY CHECKLIST FOR BUYING AN EXISTING BUSINESS│
└─────────────────────────────────────────────────┘
"Trust in Allah. But always tie your camel."
-- Ancient Arab proverb
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 records 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 contracts, leases,
franchise agreements, or any other legal arrangements which have
a significant effect on the business. Be sure you are not as-
suming an unfavorable lease or contract or losing the benefits
of a favorable one.
. If the purchase involves real estate, make an investigation as
to the possible existence of hazardous waste contamination of
the property, for which you might be held liable for astronom-
ical cleanup costs. You may even need to hire a firm to do an
"environmental 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 information and access
to the supporting data.
. Push for an allocation of the purchase price to specific 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 any non-
competition covenant; seek to minimize allocations to "goodwill"
or land purchased.
CLOSING THE TRANSACTION:
. Retain an attorney to participate in drawing up the sale agree-
ment. DON'T TRY TO "WING IT" ON THIS ONE!
. Comply with the requirements of the state Bulk Transfer Act if it
applies to the particular type of business that is being acquired
under @STATE law.
. 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 em-
ployment 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 applicable to the seller's business).
. Seek to hold back part of the purchase price as security to
indemnify you for any misrepresentations as to assets or liabil-
ities 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 indemnify 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 as an "occasional sale.")
@CODE: CA
In California, the sale of a business is often taxable, however.
@CODE:OF
If the sale will be taxable, is there a way to reshape the trans-
action 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 report-
ing 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 HORRENDOUS.
. If you are buying a corporation that has not been paying income
taxes because it has carryovers of net operating losses or in-
vestment tax credits, be aware that you will be able to use only
a small portion of those carryovers to shelter the income of the
business once you become the owner. After 1985, in general, if
there is more than a 50% change in the ownership of the stock of
a corporation that has tax loss or credit carryovers, only a
certain amount of those carryovers, equal to the yield on long-
term tax-exempt bonds (about 7% in recent years), multiplied
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 unemploy-
ment 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 unemployment 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 DE4453.
. 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 "Certificate of No Tax Due"
from the State Board of Equalization.
. 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 Proposition 13 assessed value upon which
the seller's tax was based.