I work with people to sell smaller businesses on a regular basis.
Here are some things many buyers don't think about…
1. Asset vs. Stock Sale
As already mentioned on this thread, you likely prefer an asset sale where you form a new legal entity and do not acquire the existing owner's legal entity.
In some cases, a stock sale is required due to circumstances like licenses or contracts being tied to the existing owner's legal entity that can't be quickly or practically assigned to your new entity.
As the buyer, you'll almost always come out ahead from a tax perspective on an asset sale. The bigger benefit to an asset sale though is you avoid "skeleton in the closet" risk. Those skeletons could be pending lawsuits, warranties on past work, labor issues, owed vendors, employee issues, etc.
2. IRS Form 8594
This is the number one thing that people not familiar with buying small businesses overlook, from what I see, .
When you buy a business as an asset sale, the purchase price needs to be allocated between things like inventory, tangible stuff, and goodwill. You and the seller should file Form 8594 with the IRS that shows how the purchase price was allocated.
It's important that your purchase agreement clearly defines how you'll both file Form 8594 with the IRS.
You do not want to be having conversations about how to fill out form form 8594 after money has already exchanged hands.
Get a CPA to give you advice on filling out Form 8594 and watch some YouTube videos to understand its purpose so you're educated when negotiating the allocation into your agreement.
3. Personal Guarantee
The seller should require you to sign a personal guarantee on the seller financing note. If they're not then good on you, but…
If you and your partner both sign a guarantee, but only you have financial resources to repay it, then you'll likely be the seller's focus on collection if there's ever an incentive to litigate.
4. Non-Compete
Your seller should sign a legally binding non-compete when the sale closes that adequately covers your geographic area. It's also common to require them to sign a non-solicitation agreement stating they won't attempt to poach any customers or employees.
5. Closing Documents
Each deal is unique, but you'll normally want things like an asset purchase agreement, bill of sale, lien search, certificate of no tax due, etc., handled by a closing attorney who specializes in small business sales. This cost between $7K up to 1% of the purchase price from my experience. Not something to be cheap on.
6. Buy / Sell Agreement
I'm of the same opinion as others….
you're more likely than not going to regret getting into a partnership where the other side isn't contributing capital.
If you go down that path, you should have a buy / sell mechanism in your operating agreement with the partner where you're able to buy them out.
It should ideally be for a clear amount and heavily favor you if you're putting up all the capital.
If there's debt involved, then look into getting life insurance, paid by the business, on your partner so that if anything happens to him, that policy settles his outstanding debt.
The only thing worse than getting into a bad partnership is being stuck in one!
