When you think of starting your own business, many people assume that this entails building every aspect of your business from the ground up—completely from scratch. However, this isn’t your only route to owning a business. In fact, starting from scratch and being responsible for every aspect of creation and implementation presents its own set of unique challenges.
The other option available to you is buying an existing business. While of course this option comes with challenges of its own, there are a number of advantages it can offer your business, especially in the early stages.
Often times, it’s less risky to buy an already existing business compared to starting a new business from scratch. Buying an existing business means taking on an established operation, customer base, reputation, and more. You may also find that you have easier access to financing from banks and investors, as a proven track record can be a reassuring factor.
When it comes to buying an existing business in the state of New Mexico, there are a number of steps you’ll want to complete to ensure you’re making a smart purchase. Buying a business is a big decision and a costly one, so you’ll want to do your due diligence. Here, we’ll cover the steps that you’ll want to take when buying a business.
If you’ve decided to buy an existing business in the state of New Mexico, an important cautionary step you’ll want to complete is obtaining a tax clearance letter from the state. A tax clearance letter will confirm that you’re not taking on any outstanding tax liability.
It’s common for buyers to assume that if they’re buying the business through an asset purchase (rather than stock sale) that they won’t be responsible for unpaid taxes. However, this is usually not the case, as most states allow for certain tax liabilities to be transferred to the buyer.
To request your tax clearance letter, you’ll need to submit Form ACD-31096 Tax Clearance Request to the New Mexico Tax and Revenue Department. This request does not need to come from the current business owner. The purchaser can attach a copy of the purchase agreement to the form when requesting the tax clearance letter.
The Tax and Revenue Department will issue your tax clearance letter within 30 days of request receipt. If it turns out that the business owes tax, the purchaser of the business will be responsible for paying the amount within 30 days. Note that if the Tax and Revenue Department does not respond to your request within 30 days, the purchaser will not be required to withhold money to cover the unpaid tax amount.
Along with obtaining a tax clearance letter, another important step is checking to see if any of the assets are subject to liens prior to acquisition. In particular, you’ll want to conduct a UCC lien search, which can be done on the New Mexico Secretary of State website. A UCC lien is a claim against a business asset that establishes priority in repayment for a lender (under the U.S. Uniform Commercial Code).
To check for UCC liens, you’ll need to view the state’s creditor financing statements, which are publically available records. These statements will allow you to see if there is any secured debt that you will acquire in the acquisition of equipment, inventory, and other assets.
Note that when you’re in the process of purchasing a business, whether it’s an asset purchase or stock purchase, there are a variety of possible business debts and liabilities that you’ll want to look into, such as any private obligations, guarantees, and more.
Once you have narrowed down the business you hope to buy, there remain a number of steps you’ll want to complete before making the purchase. Even if you’re very excited about a particular business and have a good sense that it’s going to be a successful investment and opportunity for you, you’ll want to do your due diligence beforehand so that there are no unpleasant surprises after the fact.
For starters, you want to have a good understanding of why the business you’re eyeing is going up for sale. There are a number of reasons this might be the case, plenty of which are completely innocent, such as in the case of retirement or relocation. However, there are a few other factors you might want to keep an eye out for.
For example, the business may be outmatched by competitors or suffering from a poorly executed or constructed business plan. Perhaps the business is in a poor location or maybe its product is outdated or not meeting market needs. There are a number of different factors you’ll want to research and understand about the business.
Even if there are certain factors that aren’t dealbreakers for you, it’s still useful to learn as much as possible about the challenges your prospective business is currently facing. Knowing these things may influence your purchase decision, or it may help you build a strategy to address those challenges when you are the new owner.
There’s a difference between simply wanting to buy a business and buying a business that sets you up for success. Taking stock of your own financial and personal circumstances, objectives, and goals can be just as important as looking into the prospective business.
Choose a business that fits well with your current goals, expertise, budget, and schedule. Ask yourself if this business is the right size for you, if you understand what it will take to run successfully, if you can manage the number of employees, etc. Taking stock of how this business will align with your goals is an important factor in the decision-making process.
It’s important that you thoroughly research and analyze as much about the business as you can before making your purchase. Utilize professional assistance at this time from lawyers and accountants that can give you expert analysis and advice. This will be important when you look over financial statements and conduct negotiations, as well as ensuring you’re not overlooking any crucial steps.
As you analyze the business, make sure it has all of its necessary licensing and permits in place that are required for conducting business. This means taking a look at both local and industry-specific licensing requirements. Additionally, review the company’s formation documents with the state, such as its articles of organization or incorporation. You will also want to ensure the business is currently in good standing with the state, which can be confirmed by a certificate of good standing from the Secretary of State.
Give a thorough look at its financials, as well. This includes balance sheets, cash flow statements, accounts payable, tax returns, debt disclosures, and other costs pertinent to the financial structure of the business. Analyze the business’ income stream and be certain that you see a clear strategy for profitability. Understand if the business has outstanding debts and whether they are included in the transaction.
Be sure to review other aspects of the business, as well. Take some time to look at the organizational structure and management practices. Conduct an inventory count that checks what’s on hand for equipment, furniture, supplies, and more. Note the quality, condition, value, and other factors pertinent to your objectives.
One of the common sticking points in this process is settling on a price between buyer and seller. Each tends to place a different set of values on the business and can see the same factors and assets very differently from one another.
Typically, a pricing model is used in the early stages to begin the valuation process. It can often be helpful to use an independent valuation service to provide an objective point of view. Even if you end up hiring a professional service, you may find it helpful to familiarize yourself with a few common valuation methods.
Earnings Approach: If the business is turning a profit and has a positive-looking forecast, this method can be used to determine future estimated benefits by measuring the company’s earnings.
Assets Approach: If the business is capital-intensive, this method can be used to determine the company’s net asset value (total liabilities subtracted from total assets).
Market Approach: This method can be used to determine value based on what similar assets have sold for while making adjustments for any differences between the two.
Once you have agreed on a price for the business, the seller will issue what is called a letter of intent. This letter will detail the price proposal, assets, liabilities, and other conditions included in the transaction. The letter of intent is a preliminary document that confirms the seller’s intention to see the deal through.
The final step! Once you’ve found the business you want to purchase, conducted a thorough analysis, and evaluated and settled on a price, then it’s time to close the deal and officially purchase your new business. To do so, there are a variety of documents, agreements, and such that you’ll need to have in place.
Adjusted Purchase Price: This document will reflect any changes that have occurred since the letter of intent and closing date. This is the final cost of purchase.
Bill of Sale: This document signals the actual sale of the business. Ownership has officially transferred from the previous owner to you (the purchaser).
Asset Acquisition Statement: This document is IRS Form 8594, which lists any assets you have acquired along with their value. This is important for your business tax returns.
There are a number of other documents and agreements that may apply to your business purchase. For example, if you’re taking over a lease, acquiring vehicles, or a transfer of patents, copyrights, or trademarks is occurring, all of these things will require further registering and documentation. Again, enlisting the services of an attorney and accountant will prove incredibly useful in the process. Their expert guidance can ensure you do not miss any important steps along the way.
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