The unemployment factor in today’s economy has sparked an interest in many of owning their own business. A business brokerage associate of mine in Phoenix conveyed that he is enjoying a robust business climate.
As you can imagine, buying a business is far different than making a home purchase and requires a different level of due diligence by the buyer and their representative.
Arizona law requires real estate agents to conduct business only within their area of expertise and the potential buyer of a business should be sure that their agent can adequately represent them and has the background and knowledge to understand a business transaction.
From experience, we have seen on occasion, the unrepresented buyer may suffer unexpected consequences in the purchase of a business. Getting the tax returns of the seller is the first critical step for the buyer.
The buyer should analyze the returns with a CPA so that there is no misunderstanding of the return on the business investment. If a seller offers a tax return but states that this is what we show on the books, but there really is a lot more profit that we keep off the books, the buyer should run away from this transaction.
If the seller is stating the truth, he is committing tax evasion. If he is lying, he is trying to perpetrate a fraud on the buyer. Either way, if you cannot trust the character of the seller, it is best to move on to the next opportunity.
Because character counts, a potential buyer often considers running a background check on the seller. This can usually be done through a law firm at a reasonable cost. The norm in buying a small business is to buy the assets of the company rather than the stock of the company.
In this way, a buyer does not assume the past liabilities of the previous owner. In addition, if equipment and inventory are involved, a buyer should direct the escrow company to do a UCC-1 check on the business to assure that they will get the equipment free of liens or liabilities.
If the business is in a leased facility, the buyer needs to be sure the lease is assumable and is put in the new buyer’s name. Lease payments should be made directly to the owner of the property and not to the seller of the business.
Owning one’s business can be a rewarding experience if the proper care and due diligence is performed during the purchase process.
Ray Pugel is a designated broker for Coldwell Banker Bishop Realty. Contact him at (928) 474-2216.