You have retired from your job of 30+ years. However, you are still young and have quite a few years left for working. Working for yourself is something you have always wanted. And you have found the perfect business for sale.
You may want to rush into it because it is such an exciting new adventure. Resist the temptation to jump in immediately. Starting a new venture without adequate preparation is a recipe for disaster. But where do you start? What do you do?
Do Your Homework. Get familiar with the industry. Talk to others already in the industry. Review the financial statements and tax returns of the business you are contemplating purchasing. Inspect assets. Verify unemployment tax and workmen’s compensation ratings. Talk to existing employees if possible. The more information that you have, the more informed decision you can make. What are the risks for which you need insurance?
Gather a Team. You should also gather a team to assist you. At a minimum, you should have a tax preparer/accountant, business attorney and insurance agent. Do you have the skill set to run the business? If not, can you hire someone to fill in the gaps? Maybe the former owner will stay on for a time as an employee or consultant. Do you need a partner? Also make sure your loved ones are on board? An unsupportive family could make the venture much more difficult.
Risk Not Thy Whole Wad. Adequate funding for the business is key. It can either be in cash or lines of credit. Be able to lose the investment if the venture fails. You do not want to draw down on your retirement funds or mortgage your house to buy the business, and then lose it all. I have seen it happen more than once. If you need an investor, do you know someone or can you find someone? Undercapitalization is one of the most common reasons that small businesses fail.
Business Assets Free and Clear. Before you plunk down any cash, verify there are no liens on the business assets. For titled assets, review titles or the register of deeds to identify any secured lenders. Search the Uniform Commercial Code Section of the Secretary of State to see if there are any security interests on any untitled assets. You do not want to buy a business and later have assets repossessed because there were more debts to pay.
Noncompetition Agreement. Oftentimes, you would want to make sure that the former business owner actually retires from that business. You do not want to buy a business for big bucks and then have the former owner open up shop the following week down the street and compete with you. I have seen that happen. A non-competition agreement with the former owner which prevents the former owner working in a competing business protects you and is enforceable so long as the time and the place are reasonable. Reasonable could be five years within the market area of the business.
Choose a Business Entity. There are a number of business entities in which you can hold a business. There is a sole proprietorship, partnership, C-corporation, S-corporation or limited liability company. There are others, but these are the most common. The type of entity that you choose will be dependent upon the types of activities occurring in the business and your tax situation. You may not be able to choose the business entity if you are buying the business’ corporation stock or limited liability company membership interests.
Wrap Up. We have only touched upon a few of the key concerns that need to be addressed when buying a small business. There are many other issues that you must also consider. Whenever you are contemplating the purchase of a business, please consult with knowledgeable professional advisors, such as an attorney and accountant, to assist you. Have a happy second career.
By: Matthew M. Wallace, CPA, JD
Published edited in Savvy magazine February 2015 as: Retirement and Second Careers