BEWARE OF THE "GOTCHA'S" IN BUYING A BUSINESS

1. Are you buying assets or stock?

2. What's the price?

• Fixed amount
• Fixed amount plus assumption of liabilities
• Other

3. What are you buying?

• Inventory -- is it obsolete?
• Raw materials -- are they usable?
• Accounts Receivable -- are they collectible?
• Equipment -- is it in good working order and sufficient to operate the business?
• Lease -- is it assumable on the same terms?
• Is the name included?
• Franchise rights and other contracts rights.
• Non-competition agreement/goodwill.

4. What liabilities are you assuming?

• Liens on equipment -- better do a UCC search.
• Outstanding contracts -- are they assumable?
• Contingent liabilities.
• Employment agreement.
• Warranty work or refund claims on past sales.

5. Tax Aspects of buying a business.

• Price allocation can substantially affect your write-offs.
• Sales tax clearance from State Board of Equalization.

6. Other compliance areas.

• Bulk sales notice if asset purchase
• Securities consent if stock purchase.
• Fictitious Business Name Statement.

7. Continuing liabilitv after the purchase

• Indemnification.
• Personal guarantees -- where purchaser is corporation.

8. Do your homework before you buy.

• Review financial statements.
• Talk to customers.
• Talk to suppliers.
• Can you live with the purchase agreement?

Buyinq a Business

Basic requirement - Management capability - 75% chance of success

1. Basic knowledge of business - get job for a short period of time. -
2. Compatibility to type of operation indoors or out - enjoy what you are doing.
3. Limited capital and available financing
4. Potential of industry - competition

Sources -

1. Business brokers - check reputation with Better Business Bureau - Trade ` associations
2. "Business Opportunities" column - Local Newspapers
3. Trade Associations - Banks - Product Suppliers

Evaluation

1. Reason for selling - Health - Retirement
2. Divorce - Financial bind
3. Business failing - Increased competition - Obsolete inventory
4. Hiway re-route - closing off-ramp - Expiring lease or Franchise Agreement Lack of energy or incentive
5. Financial statements - Accountant
6. Contact adjacent businesses
7. Foot and auto traffic - Parking
8. Customer count

Purchase Price

1. Merchandise - Count - Cost or market value Condition - Obsolesence Consigned stock Fixtures - Cost less depreciation - "Used " dealers -Appraiser
2. Physical condition - Leased ? Liens ?
3. Accounts receivable - Collect for Seller - Trust a/c
4. Insurance & Property Tax - Pro-rate
5. Goodwill - Evaluation - Allocate to fixtures & leasehold improvements (depreciable)
6. Accounts payable - guarantee
7. Suppliers - Contact re continuation
8. Store lease - Transferable - period - renewal option

Escrow

1. Collection of accounts receivable
2. Assigned leases
3. Tax clearances
4. Guarantee of liabilities not shown
5. Covenant not to compete
6. Pro-ration of P. P. tax and insurance
7. Transfer of name

Making offer known

1. Brokers - Newspapers (Business Opportunities)
2. Trade Associations - Suppliers

Sellers check list

1. Financial information - Good points
2. Screen prospects - Capital - Background

Selling price

1. Merchandise - count & price
2. Insurance - Taxes - pro-rated
3. Receivables - collected for you or guaranteed
4. Fixtures - Cost less depreciation vs market
5. Goodwill computation

Salary for owner/operator
Yearly net profit
Extra earning power
Multiple factors

1. Young - 1 - 2 - 3
2. Established 5 to 10
3. Unique 15

Closing Sale

1. Attorney Escrow Company or bank
2. Landlord - transfer of lease
3. Equipment lease transfer
4. Notify unpaid creditors to submit bills
5. Tax clearances - Sales - Soc.Sec. - Unemp.