How to Buy an LLC
Forming an LLC from scratch can seem daunting to a new entrepreneur. An alternative is to buy an existing limited liability company.
Before buying an LLC, you need to do detailed research to understand what you’re acquiring and what it should cost.
You’ll also need written agreements that spell out every deal part. By following these steps, you improve the chances that your entrepreneurial dream will become a happy reality, not a financial and legal disaster.
Discover a Corporation to Buy
The first step in buying an LLC is locating a business for sale. This may not be as easy as it sounds.
Try networking within your regional chamber of commerce or a trade group for the industry you want to be in. Trade magazines and business newspapers may be another source of leads. You might also seek out older business owners who may soon be ready to retire.
Once you have found an LLC to buy, you can begin negotiations. Be sure you are dealing with someone allowed to negotiate on the business’s behalf.
At this point, you’re not trying to make a firm deal. Your goal is to initiate a discussion so you can find out as much as possible about the business before you decide whether to buy.
It would help if you requested the current business owner to give you access to all of the company’s books and records.
You may need to supply the owner with a financial statement to prove that you are serious and capable of purchasing the business. Furthermore, the owner may ask you to sign a confidentiality agreement that prohibits you from unleashing information about the company to anyone other than your attorney or financial advisor.
Related: Trademark Registration – Register a Trademark and File Your Trademark Application Online
You wouldn’t buy a house without a home inspection and a label report, and you don’t want to purchase an LLC without understanding everything you can about its economic condition. Due diligence is simply the process of comprehensively reviewing a business’s records.
What should you look at?
Anything that reflects on the business’s operation or finances, including accounting books and registers, tax returns, leases, loans, mortgages, the LLC operating agreement and LLC articles of organization, employment contracts, vendor contracts, and business licenses.
You may also need to search public records for mortgages, liens, or parcel tax obligations.
What are you looking for? You want to understand the business’s assets and obligations.
What are its incomes and expenses?
Have profits been going up or down, and why?
If there are leases, loans, or mortgages, what are the terms, and can or should you take them over?
Does the operating agreement restrict the sale of the LLC?
Due diligence is likely to affect reviewing some complicated documents.
Legal documents, in particular, can be long and hard to comprehend, yet you must know what they say if your LLC purchase is going to be a success.
For this reason, it’s a good idea to hire a lawyer to assist with some or all of the due diligence.
The Term Sheet, or Memorandum of Understanding
While fulfilling your due diligence, you can continue negotiating with the business owner. You may decide to purchase the LLC as a whole or purchase its assets.
You may begin to outline what the purchase will and will not include. And you may come at an initial purchase price and payment terms.
These things are typically spelled out in a term sheet or memorandum of understanding. This is a short document that specifies the essential components of the purchase deal.
It confirms the parties’ intentions and serves as a blueprint for a more formal contract. An attorney’s help is valuable because an attorney can advise you on what should be included and reasonable terms.
The Purchase Agreement and Related Documents
When you have completed your due diligence and arranged the significant points of the trade, it is time to memorialize the deal in a purchase agreement.
A purchase agreement is a formal legal document containing everything from the purchase price to what you are purchasing to your remedies if something goes wrong. Both you and the seller will sign the purchase agreement.
You may need other arrangements as well.
For example, the business landlord may require you to sign an assignment or negotiate a new lease.
You may want the business seller to sign an agreement not to compete with you.
If you have bought the LLC and not just its assets, you may need to inform your state that the LLC has changed ownership.
If you are not maintaining the same registered agent listed on the articles of organization, you will need to provide the state with the name and address of your new registered agent.
If you purchased only the LLC assets, you might want to form a new LLC or business if you haven’t done so already.
It would help if you also informed taxing authorities and any agencies that provide licenses to the LLC.
If you want to start a business, buying an LLC can be an excellent alternative to LLC formation. However, don’t let your entrepreneurial spirit get in the way of your common sense. Entirely investigate any business you want to buy, and be willing to walk away if it looks like a bad deal.
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