Before you buy an LLC, you need to do careful research to make sure you know what you’re getting and what it should cost.
You’ll also need written agreements that spell out every aspect of the deal. By following these steps, you increase the chances that your entrepreneurial dream will become a happy reality and not a financial and legal disaster.
1. Find a Business to Buy
Of course, the first step in buying an LLC is finding a business that’s for sale. This may not be as easy as it sounds, since business owners who are looking to sell or retire seldom advertise on Craigslist.
Try networking within your local chamber of commerce or a trade group for the industry you want to be in. Trade publications and business newspapers may be another source of leads. You might also seek out older business owners who may soon be ready to retire.
2. Begin Negotiations
Once you have found an LLC to buy, you can begin negotiations. Be sure you are dealing with someone who is authorized to negotiate on the business’s behalf.
At this point, you’re not trying to make a firm deal. Your goal is to initiate a conversation so you can find out as much as possible about the business before you decide whether to buy.
You should ask the current business owner to give you access to all of the business’s books and records.
You may need to provide the owner with a financial statement to prove that you are serious and capable of purchasing the business, and the owner may also ask you to sign a confidentiality agreement that prohibits you from disclosing information about the business to anyone other than your attorney or financial advisor.
3. Due Diligence
You wouldn’t buy a house without a home inspection and a title report, and you don’t want to purchase an LLC without knowing everything you can about its financial condition. Due diligence is simply the process of thoroughly reviewing a business’s records.
What should you look at? Basically, anything that reflects on the business’s operation or finances, including accounting books and ledgers, tax returns, leases, loans, mortgages, the LLC operating agreement and LLC articles of organization, employment agreements, vendor agreements, and business licenses.
You may also need to search public records for mortgages, liens, or property tax obligations.
What are you looking for? You want to understand the business’s assets and its debts.
What are its revenues and expenses? Have profits been going up or down, and why? If there are leases, loans, or mortgages, what are the terms, and can or should you take them over? Does the operating agreement restrict the sale of the LLC?
Due diligence is likely to involve reviewing some complex documents.
Legal documents in particular can be long and hard to understand, yet you must understand what they say if your LLC purchase is going to be a success. For this reason, it’s a good idea to hire a lawyer to assist with some or all of the due diligence.
4. The Term Sheet, or Memorandum of Understanding
While you are conducting your due diligence, you can continue to negotiate with the business owner. You may decide to purchase the LLC as a whole, or just purchase its assets. You may begin to outline what the purchase will and will not include. And you may arrive at a preliminary purchase price and payment terms.
These sorts of things are typically spelled out in a term sheet or memorandum of understanding. This is a short document that specifies the basic components of the purchase deal.
It confirms the parties’ intentions and serves as a blueprint for a more formal contract. An attorney’s help is useful because an attorney can advise you on what should be included and what terms are reasonable.
5. The Purchase Agreement and Related Documents
When you have completed your due diligence and agreed on the major points of the transaction, it is time to memorialize the deal in a purchase agreement.
A purchase agreement is a formal legal document that will encompass everything from the purchase price to what you are purchasing to your remedies if something goes wrong. Both you and the seller will sign the purchase agreement.
You may need other agreements as well. For example, the business landlord may require you to sign an assignment or negotiate a new lease. You may want the business seller to sign an agreement not to compete with you.
If you have purchased the LLC and not just its assets, you may need to notify your state that the LLC has had a change in ownership.
If you will not be keeping the same registered agent that’s listed on the articles of organization, you will need to provide the state with the name and address of your new registered agent. If you purchased only the LLC assets, you may want to form a new LLC or corporation, if you haven’t done so already.
You should also notify taxing authorities and any agencies that provide licenses to the LLC.
If you want to start a business, buying an LLC can be a good alternative to LLC formation. However, don’t let your entrepreneurial enthusiasm get in the way of your common sense. Thoroughly investigate any business that you want to buy, and be willing to walk away if it looks like a bad deal.