Small Business Big World Episode 21: Practical Tips for Buying a Small Business
This is Small Business Big World, our weekly podcast prepared by the team at Paper Trails. Owning and running a small business is hard. Each week we’ll dive into the challenges, headaches, trends, fun and excitement of running a small business. After all, small businesses are the heartbeat of America and our team is here to keep them beating.
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Buying a small business can be an exciting, and scary, journey. Many aspiring entrepreneurs face fears and uncertainties about where to start, how to navigate legal requirements, and how to secure financing. At Paper Trails, we understand these challenges and are committed to helping small businesses through the complexities of payroll, HR, and management. In this podcast episode of “Small Business Big World,” we will explore practical tips and legal insights on buying and financing a small business. You’ll learn about finding the right business, forming a legal entity, understanding the role of a Letter of Intent (LOI), financing options, asset allocation, and the benefits of setting up multiple LLCs.
Finding the Right Business to Buy
One of the first hurdles in buying a small business is finding the right one. Pat Brady, an attorney at Bergen Parkinson and an experienced local business owner, emphasizes the importance of leveraging online platforms like BizBuySell and LoopNet. These websites offer a wide array of business listings and are a great starting point for your search. However, online research is just the beginning. Building industry relationships and understanding succession planning are equally crucial. Pat’s own business acquisitions, such as MAIL-IT UNLIMITED and Crateful of Maine, were facilitated through a combination of online research and industry connections.
Forming a Legal Entity: LLC vs. Corporation
Once you’ve identified a business to buy, forming a legal entity is a critical next step. The episode breaks down why an LLC (Limited Liability Company) might be the best choice for many small business owners. LLCs offer significant flexibility and liability protection compared to corporations and sole proprietorships. Pat explains that while forming an LLC is relatively straightforward, having an operating agreement is essential. This document outlines governance and financial arrangements, especially important when multiple owners are involved.
The Role of a Letter of Intent (LOI) in Buying a Small Business
Before diving into detailed agreements, an LOI (Letter of Intent) is often used to outline preliminary terms like purchase price and transaction structure. Although generally non-binding, an LOI helps align both parties and set the stage for drafting more definitive documents. Pat stresses that an LOI helps avoid wasting time and money, ensuring that everyone is on the same page before moving forward.
Financing Your Business Acquisition
Financing is often a complex aspect of buying a business, but this episode simplifies it by exploring various options. Traditional bank loans, seller financing, and SBA (Small Business Administration) loans each come with their own set of pros and cons. Pat shares his tips on attracting investors and the challenges of stacking multiple financing methods. For instance, combining a bank loan with seller financing can be a strategic move, but it requires careful planning and due diligence.
Asset Allocation and Due Diligence
Another critical aspect discussed is the importance of asset allocation and due diligence. When buying a business, both buyer and seller must file detailed asset class forms with the IRS. Consistency in these filings is essential to avoid future issues. The episode also highlights the differing tax implications for buyers and sellers, especially concerning goodwill and hard assets. Including key financial statements and disclosures in the purchase and sale agreement is crucial to protect against potential post-closing issues.
The Benefits of Setting Up Multiple LLCs When Buying a Small Business
For those involved in real estate investments, setting up multiple LLCs can offer strategic benefits. Each property can be held in a separate LLC, limiting liability and protecting individual assets. Pat explains that this approach is particularly useful for mitigating risk, as liabilities in one LLC do not affect the others.
Why Local Businesses Should Consider Local Entities
The episode also covers the debate on whether small businesses should form their LLCs in states like Delaware or Nevada, known for their business-friendly laws. Pat argues that local businesses can often avoid the extra administrative costs of out-of-state registrations by forming their entities locally. For most small businesses, the legal benefits of forming an entity in Delaware or Nevada do not outweigh the additional costs and complexities.
Conclusion
In summary, buying a small business involves several key steps, from finding the right business and forming a legal entity to understanding financing options and asset allocation. This episode of “Small Business Big World” with Pat Brady provides a treasure trove of information, offering expert advice and real-world stories to help you navigate the process. At Paper Trails, we are here to support you through every step, ensuring that your entrepreneurial dreams become a reality. Tune in to the podcast for a deeper dive into the legal and financial strategies essential for buying and financing a small business.
This podcast is a production of Paper Trails. We are a payroll and HR company based in Kennebunk, Maine, and we serve small and mid-sized businesses across New England and the country. If you found this podcast helpful, don’t forget to follow us at at Paper Trails Payroll across all social media platforms and check us out at papertrails.com for more information. As a reminder, the views, opinions and thoughts expressed by the hosts and guests alone. The material presented in this podcast is for general information purposes only and should not be considered legal or financial advice. By inviting this guest to our podcast, Paper Trails does not imply endorsement of or opposition to any specific individual, organization, product or service.