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December 2009/January 2010 – Web Exclusive

Business Ownership – Is it for You?

“Every house has problems, and you don’t know what those are until you inspect it. The same goes for a business, only there’s more money at stake.”

– David Willis, attorney

Ins and outs, dos and don'ts

by Clint Shields

Keeping an eye on overhead, hiring and firing, managing inventory and office space: all this fun can be yours, if you’re willing to buy a business in Texas.

There’s plenty of opportunity — the state had more than 2 million small businesses in 2006 — but it’s not quite as simple as finding a business for sale and opening your checkbook.

The Business Friendly State

Even in a slumping economy, interest in Texas business ownership has not waned.

“Interest has skyrocketed, actually,” says David Willis, a Houston-based attorney whose practice focuses on small business. “With the economy down, unemployment is up and a lot of those people are tired of having their livelihood in someone else’s hands. The alternative is starting your own business or buying an existing one.”

Financing is the tallest hurdle, he says, and troubles in the financial industry have limited traditional financing options. Alternatives such as seller financing or angel investors are out there, but aren’t always easy to find. But the right people, Willis says —usually investors or those who have a passion for a particular industry — find a way to get what they want.

“Usually, they have contemplated owning their own business for many years,” he says. “At some point, there is a life event that gets them to make the jump into business ownership.”

“The first-time business owner thinks he sees a good business that runs smoothly and all he will have to do is pay some money, step into the current owner’s role and do what he does,” says David Willis, a Houston-based small business attorney. “It doesn’t work that way.”

Buying a small business — one with fewer than 500 employees — is like buying a house, Willis says, only much more complex.

“Every house has problems, and you don’t know what those are until you inspect it,” he says. “The same goes for a business, only there’s more money at stake.”

Regardless of the size or type of business, Willis says, there are three basic steps in the acquisition process.

The Letter of Intent

While a letter of intent (LOI) is not a binding contract, it does allow the purchaser to evaluate the merits of the deal while assuring the seller that a legitimate purchase attempt is being made.

An LOI typically includes an exclusivity clause that protects the prospective buyer from being outbid by another interested purchaser. It will also contain a confidentiality clause that protects any proprietary information, trade secrets or confidential techniques of the seller.

“The obvious fear is that someone might feign the role of a purchaser to gain access to a seller’s confidential information,” Willis says. “A properly drafted confidentiality clause answers that concern.”

Finally, the LOI will contain a closing date and provide a timeline within which both parties should conclude the proceedings.

David Willis,
a Houston-based attorney whose practice focuses on small business

Due Diligence

“Due diligence is the inspection process to ensure a buyer is aware of all the business’s faults,” Willis says.

If done correctly, this review is a thorough and tedious process, but also a very important one. Due diligence helps a buyer identify and place a value on a business’s assets, its outstanding loans, business relationships and contractual agreements, among other factors.

“Exposure to liabilities is also important,” Willis says. “Has the business been paying employment taxes? Income taxes? Are the books complete? The buyer needs these and other answers.”

A seller has different concerns, but the process is just as important.

 “Due diligence can be disruptive to a business, so how long does the seller allow?” Willis says. “Is the buyer legitimate? Many sellers will also be concerned about their employees and any assets they don’t want included in the sale.

“Due diligence is the most important thing when buying a business,” he says.

Check the Taxes

One of the most important steps for a purchaser is checking the status of taxes owed by the seller.

“We strongly advise a business purchaser to request a certificate of ‘no tax owed’ from the Comptroller’s office,” says Kevin Koller, assistant director of the Comptroller’s Tax Administration Division. “Sometimes they’ll ask, ‘Do they owe any taxes?’ But that’s not the same thing as having the certificate. That certificate absolves the purchaser of any tax that may be due when the business is sold.”

Timing is also key, Koller says, adding that law firms make many certificate requests only hours before a sale is finalized, which does not allow ample time for a thorough audit of the tax situation.

The Closing

After a thorough due-diligence process, both sides should have enough information to close the sale and iron out any final questions. At the actual closing, Willis says commonly needed documents include a purchase/sale agreement, financing agreement and change-in-ownership forms, but that each individual sale varies.

Ultimately, navigating the twists and turns of buying or selling a business is not an exercise for the timid.

“There are any number of things that drive small business owners, and it’s different for every one of them,” he says. “One thing they all have in common is the ability to cope with risk.” FN

Willis provides more information on business purchases on his blog. Information on small businesses is also available from the Small Business Administration and the Texas Secretary of State. Information on buying an existing business, including instructions for obtaining a certificate of no tax owed, is available on the Comptroller’s Web site.

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