Business Law 101 / BUYING AN EXISTIG BUSINESS-VALUE

By Albert L. Kelley, Esq.

We discussed last time starting a business from scratch. But what if you decide to buy an existing business?  Buying an existing business comes with a tremendous number of decisions and agreements.  While most people think the price is the most important issue to consider, it is just one of many.

Often a buyer will start with visiting a realtor.  This is a common practice, but requires research.  Just as many lawyers specialize in areas of business, realtors often specialize in various types of transactions.  Some focus on residential properties; some focus on commercial properties; and others focus on businesses.  Make sure the realtor you are working with has experience in business transactions.  Buying a business is not the same as buying real estate, and realtors unfamiliar with the differences will often use improper documentation, such as trying to manipulate a residential sales contract to cover the business sale.  

Another issue that you find with inexperienced realtors is valuation.  Unlike real estate, it is not as easy to determine an appropriate price to pay for a business.  While real estate values can be calculated by comparing the sales of similar properties, each business is unique and relies on a combination of factors such as type of business, size of commercial space, and location of store. Comparing two businesses in different parts of town is like comparing apples to oranges. Some realtors will try to estimate what a reasonable price should be for the business. Be careful when accepting this value.  Business valuation is a specialty practice that requires detailed knowledge of the assets of the business, the accounting of the business, and the market.  While some website will say there are only three or four ways to value a business, in actuality there are numerous methods.  The primary valuation methods are the Asset Method, where you calculate the value of all the hard assets of the company, the Market Approach, where you look at what other businesses in the area have sold for, and the Multiple of Gross Income where the gross income of the business is increased by a fixed multiplier.   There area also the Discounted Cash Flow method, the Return On Investment method, the Price-to-Earning method, the Earnings Before Taxes method, and the Multiple of Gross Income.  However, at the end of the day, most businesses re sold simply based on what one person wants to receive and another person is willing to pay.

The next question to ask is whether to buy an existing company, or whether to just buy the assets.  As a general rule, Sellers want to sell the company; Buyers want to buy the assets.  Why?  If you buy the stock or membership of a company or LLC, you are getting the assets, but you are also getting then liabilities. If the Seller hasn’t paid their sales tax, you now owe it; if there was a slip and fall in the last two years, the Buyer  may be buying a lawsuit.  By buying only the assets, the Buyer gets all the benefits without the liabilities. The Seller continues to be liable for his debts and obligations.  So why is this an issue?  Why would anyone buy the company?  Sometimes the company brings benefits you don’t get the assets.  For example the company may hold certain licenses that are not transferrable.  Or the company may have a long history that the new owner wants to continue.  This issue can also arise when the Seller only owns a majority stake in the company.  Here the Seller can sell his majority interest, giving the Buyer control, even if minority shareholders don’t agree to sell.

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University.  He is also the author of “Basics of Business Law” “Basics of Florida’s Small Claims Court” and “Basics of Florida’s Landlord-Tenant Law” (Absolutely Amazing e-Books). This article is being offered as a public service and is not intended to provide specific legal advice.  If you have any questions about legal issues, you should confer with a licensed Florida attorney.

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