One of the best ways to get a head start in business is to purchase an existing one. Here in Pittsburgh, there are plenty of businesses for sale from local restaurants to chain stores and factories. Sometimes, the proprietors decide to retire and sell to a buyer as an exit strategy. Other times, the owners are unable to turn a profit and need to sell. Buying an existing Pittsburgh business is also another way to grow your own company through vertical integration of suppliers and customers, or horizontal integration by buying your competitors. Before you undertake the process, you are going to need to consider a number of factors. This includes choosing an experienced business attorney to help guide you through the transaction process.
1. Due Diligence
No matter how small the target business may be, you are going to want to do a thorough investigation of all of its aspects. This is what is referred to as due diligence. This is where you, your attorney, accountant, and other advisors go through the financial statements, tax returns, contracts, leases, and other documents of the target business. The key is to make sure that the financial and operational condition of the business matches what is reflected in its financial statements. It is also designed to see if the valuation is correct while uncovering any debts, liabilities, and legal matters that may prove detrimental in the future.
A successful due diligence will confirm that you should go forward with the acquisition or merger, while an unsuccessful one will either kill the deal or require you to renegotiate the terms, conditions, and purchase price.
2. Type of Entity
Unless you have an existing business entity that will be making the acquisition, you should consider forming a new entity. This should be one that limits your personal liability for any debts or obligations of the business. The most common types are a subchapter S corporation and a limited liability company (LLC). The subchapter S corporation does not get taxed like a subchapter C corporation, instead having the investors report their share of the profit or loss of the business on their personal income tax returns. An LLC also can avoid the double taxation problem of a subchapter C corporation. The biggest advantage of an LLC is that you can structure it however you would like, which makes it similar to a partnership while retaining the limited liability benefits of a corporation.
3. Structure of the Acquisition
One of the most critical decisions is how to structure the acquisition. The most common way is to do an asset purchase. This is where you will only buy the specific assets that constitute the business from the seller, leaving behind any debts or liabilities. This may include such things as intangible assets like business name and intellectual property, contract rights, and tangible assets like property, plant, and equipment. The advantage of an asset purchase is that you won’t be responsible for the debts of the business as long as you specify that the seller will be obligated to pay them on or after the closing of the transaction.Â
Another way to structure the deal is to do it as a stock acquisition or merger. In this type of deal, you acquire the entity that owns the target business. The advantage of this is that you get all of the assets, so you don’t have to worry that you may have left something behind. In addition, this can be necessary if some of the assets are non-transferrable, such as a license or registration as a publicly traded company. The risk is that you will be responsible for the debts of the entity you acquire unless you arrange to have them paid off at the closing.
4. Non-Compete Agreements
When you buy an existing business, you want to make sure the experienced seller can’t take your money and set up a competing business across the street. Pittsburgh is not a very large city, and having the person who sold you the business go into competition with you can eat into any profits you hope to gain. This is why it is crucial to make sure that non-compete agreements are signed by the seller and any key people who are not joining your enterprise.
5. Taxes
As with the sale of any assets here in Pennsylvania, the government is going to want to get tax revenue if at all possible. That is why you and the seller will have to agree on the allocation of the purchase price. Some things will be subject to taxation, while others will not. This is something that will need to be addressed by an accountant and tax attorney. The last thing you want to have happen is to run afoul of the taxing authorities because you and the seller reported different allocations of the purchase price.
Contact Our Pittsburgh Business Attorneys Today
Acquiring another enterprise is a great way to grow an existing business or to start one for yourself. The experienced business attorneys at Jones Gregg Creehan & Gerace, LLP, can assist you with your transaction, providing the expert assistance you need to make sure that it goes smoothly and that you are doing things the right way. Contact us for an initial consultation.