Starting a new business from scratch requires a lot of work and expense, so for many entrepreneurs buying an existing business is more appealing. An established customer base, employees and suppliers, and the notion that someone has already done all the heavy lifting, are just a few of the reasons “pre-owned” can rival “new.”

But buying an existing business is still a complex process. Typically, potential buyers have preliminary discussions about terms of the sale with the seller. After a preliminary agreement is reached between buyer and seller, a Letter of Intent, or LOI, is often the next step. The LOI sets forth the rudimentary terms of the deal and establishes confidentiality. It also establishes whether the seller has to deal with you exclusively during the next phase, or if he can entertain other offers.

Following the LOI, you will need to do your homework, or conduct “due diligence.” Due diligence is a detailed review of the business that will help you uncover potential problems. Consequently, you will want to review and verify all of the information the seller has provided to you. The items you will need to review include the record book, historical and current financial data, tax returns, business plans, minutes of directors’ and shareholders’ meetings, all contracts with suppliers and customers, and all information relating to employees and contractors.

Here are some questions that should be asked when considering a business purchase:

-          What is the business worth? This is often more complicated than it seems, and the answer depends on the types of assets, past performance, future potential, customer contracts, tax considerations, and the effect of the new ownership on the business.

-          Should the transaction be structured so that you’re purchasing assets from the business, or purchasing the business itself (i.e. a stock purchase)? The answer will dictate whether you get the liabilities along with the assets.

-          If an asset sale, should you set up a business entity to buy the assets?

-          How will the purchase be financed?

-          Does the business own or lease real estate? Depending on the answer, you will either need to review the lease or consider all that goes into buying real estate as well.

-          Are you going to keep the employees?

-          Should you enter into a non-compete agreement to keep the seller from starting a similar business nearby?

Assuming you want to pursue the purchase, a Purchase Agreement is used to formalize the terms. As the closing approaches, various documents might be prepared including deeds, assignments, bills of sale, consulting agreements and non-compete agreements.

Buying a business can be one of the most rewarding things you can do, but it can also be an intimidating process. Make sure you start your new venture on the right foot!