• Sun, Jun 14, 2020
  • Six Things Every Buyer Must Look at Before Buying a Distressed Business
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  • Buying a distressed business can be a terrific bargain for the right buyer; however, a wrong move could make it a significantly more trying and less profitable event.  Make sure you closely inspect these six important items before you buy:

    1. Review All Debt on the Balance Sheet:  Make sure all debt is paid up-to-date.  If any debt is in default, speak to the creditor to make sure any attached assets will not be lost in the sale.  You may either require the seller to pay off the debt and any penalties with the proceeds from the sale to ensure debt-free conveyance of any liened assets, or you may work with the creditor to assume the debt as part of the purchase price.
    2. Review the Assets:  Understand in an asset purchase, you may pick and choose the assets you purchase.  Don't be afraid to tell the seller you don't want old or poorly maintained equipment.  Have the seller bear the time and expense of selling or scrapping items you will not need.  And certainly, reduce the price accordingly.
    3. Ensure Sales Taxes are Paid:  In many states, unpaid sales tax will survive an asset sale and become the responsibility of the new owner.  Make sure the seller is current in their payments and you withhold a portion of the sales price for a sufficient amount of time to ensure the seller pays off any additional accrued sales tax.
    4. Ensure the Lease is Paid:  In tough times business owners will often negotiate delayed rent payments or stop paying rent once they believe the business will be sold.  Make sure you speak to the landlord early on in the process to make sure the seller is either current in their rent or not so far behind as to not be able to make the landlord whole from the proceeds of the sale.  Developing this relationship will also help ensure the landlord alerts you if the seller stops paying rent.
    5. Ensure Key Suppliers are Paid:  In tough times, business owners will often negotiate delayed supplier payments or stop paying them altogether once they believe the business will be sold.  Make sure the seller can provide you Statements of Account from each key supplier to make sure the seller is not so far behind as to not be able to pay their accounts payable from the proceeds of the sale.  This is especially important with businesses that sell alcohol in states where licenses are tied to a location and not the license holder.  Unpaid suppliers can halt all future deliveries to a location that is not paid up.

    6. Make Sure Employees Have Been Paid:  Most state laws require business owners to pay all wages and deferred compensation.  Violations can result in civil penalties.  A buyer is safe from any unpaid compensation by the seller; however, employees tend to scatter if they are not being paid.  You do not want to assume a business without a fully trained staff on board.

    If you are looking to purchase or sell a distressed business, let us know.  We would be happy to guide you through the process.

    Best,
    Eric J. Gall
    239-738-6227
    [email protected]