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June 27, 2017    

Understanding key points to purchasing a business

SELLINGSTORES AGENCY RELATIONSHIP: Our agency relationship is with the Seller, not the Buyer. Since SellingStores specializes in selling retail businesses. Our contracts and processes are specifically designed to sell retail businesses. By providing access to these contracts and processes, SellingStores is not attempting to create an agency relationship with the Buyer. Instead, SellingStores is merely facilitating the sale process for our Seller. SellingStores encourages Buyers to obtain independent legal and accounting advice.

UNDERSTAND THE LEASE: The typical lease requires the lessee to pay all the landlord’s expenses to maintain the property. This is referred to as a Triple Net Lease (Taxes, Insurance and Maintenance). This is paid over and above the base rent and includes, but is not limited to, property taxes, insurance, and the maintenance or replacement of landscaping, heating and air conditioning, exterior walls, roof, hot water heater, ceilings, plumbing, electrical, and the parking lot. Furthermore, make sure the building meets all ADA standards. Every lease has different requirements. MAKE SURE TO UNDERSTAND THE OBLIGATIONS UNDER THE LEASE BEFORE BEFORE CLOSING ESCROW.

 

LIQUOR LICENSE TRANSFER: If the business has a liquor license it usually takes a about 45 days from posting to actually transfer the license. Escrow can not close until the license transfers. — no exceptions.

DUE DILIGENCE: SellingStores never wants to sell a Buyer a business until the buyer has a chance to validate the information and inspect the premises and equipment. Our purchase agreement is designed to provide time for the Buyer to perform a thorough due diligence process. If the Buyer needs more time, talk to the SellingStores agent. We’re not here to sell a business you don’t want!

PREMISES & EQUIPMENT INSPECTION: We strongly encourage a Buyer to thoroughly check the equipment and premises including the parking lot, roof, heating and air conditioning system, hot water system, exterior and interior walls, and the ceilings. Should there be a defect, please notify the SellingStores agent in writing of the defect. Also, check the lease to determine who is responsible for repairs.

 

FINANCIAL DUE DILIGENCE: Make sure to perform a financial due diligence that meets your type of purchase. Obviously an income purchase contains a significant amount of goodwill requiring the Buyer to do a thorough financial due diligence that could include reviewing of bank statements, point of sales system, general ledger, payroll, and accounts payable. You are making a large investment warranting a detailed analysis, make sure you do it. Seek an accountant to help with the process if need be. If it is an asset purchase where there is virtually no or little goodwill, than make sure the assets are worth the price. The assets would include the equipment, leasehold improvements, lease, liquor license, entertainment permit, and location. Remember, the value of an asset is in the eyes of the purchaser. Every one will have a different value for the same asset.

CLOSNG ESCROW: Escrow can close in 30 days if there is no liquor license or SBA loan. If there is, expect 75 -120 days to close escrow.

BUYER’S RESPONSIBILITIES: The Buyer is responsible for getting all the permits and licenses to operate the business. SellingStores does not work for Buyers. SellingStores gives the Buyer a checklist of items to be completed before the sale is final. SellingStores can help direct a Buyer, but SellingStores does not do it for the Buyer.

 

SELLER WARRANTIES:  When purchasing a business the Seller must insure the business is in full compliance with all governmental regulations. Unless negotiated otherwise, the seller pays the cost to comply with the regulations. Furthermore, unless negotiated otherwise, the seller must also insure the equipment is in working condition upon transfer of the business. This doesn’t mean the equipment made new. This being said, there are cases where the equipment could fail a week or month after taking possession. Unless it can be proven by preponderanceof the evidence the equipment was faulty prior to taking possession, it would be a better use of resources to run the business rather than seek damage in a legal battle.

SBA LOANS: To obtain an SBA loan a business must have: (1) solid tax returns whereby a thorough analysis reveals a consistent owner’s cash flow for the past three years that supports the price, and (2) the Buyer must have good business experience with good credit history and collateral, such as real estate, in order to secure the loan. There are circumstances where the bank is more interested in cash flow than in the Buyer’s Collateral and will lend money even though the collateral is lacking. Also, banks don’t lend less than $250,000. So the price must be greater than $250,000. Please consult the SellingStores agent for details. It normally takes a couple weeks to complete a loan package and a couple weeks for the bank to approve the loan. After the approval, it takes 45 to 60 days to close the purchase.

SELLER FINANCING: If a Seller extends credit, expect the Seller to check the Buyer's credit and financial information. SellingStores does not perform credit checks. SellingStores will, however, supply the Seller with a “Buyer Information Form” containing the Buyer’s work experience, personal financial statement, and a credit authorization approval letter. The loan will most likely be secured with real estate, the business assets, and a personally guarantee.
 

ESCROW FEES: The typical escrow fee is about $1,900 split equally between Buyer and Seller. The escrow fee increases with a higher sales price, buyer notes, SBA loan tie-in, or any other special services requested. A Buyer should see the escrow fee as an insurance policy the business will transfer free and clear of all debts and obligations. No one has a legitimate claim against a Buyer for the debts of the previous Seller.

EARLY POSSESSION: It is possible to take possession of the restaurant before escrow closes. To achieve an early possession the Buyer must obtain all licenses and permits, a lease assignment, a loan if any, insurance, and must deposit 100% of funds required to close the deal into escrow. The funds can be in the form of cash and note. Of course the Seller must agree to give the Buyer early possession. Talk to a SellingStores agent about this option.

Thank you

Mel Jones

President & CEO

SellingStores

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