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In an asset transaction you get exactly that—assets. In such a purchase you may have to consider the risks of running afoul of the bulk sales act. For example, if you were to purchase the inventory of a shoe store and move it across the street to where you have leased new premises, you had better verify that the merchandise has been fully paid for. If there is any money owing, suppliers can go after you.
In any purchase, after you pay the deposit, the vendor will supply a list of creditors and relevant tax liabilities. On closing, you would pay off the creditors, obtain their waiver, and then deduct these amounts from the final settlement with the vendor. You should get an opinion from a CPA or lawyer on any matter that is not clear.
You will need financing. Don't be discouraged by the first, second, or even third rejection. Keep trying but at the same time inquire about the vendor's needs. If you have impressed him with your sincerity, you may want to explore the possibility of their taking back a chattel mortgage for a couple of years.
In any negotiation it is wise to understand the goal of the other party. Focus on getting the business rather than on the problems. Financing an existing business that has a profitable history is certainly easier than one on the brink of liquidation. But often the latter is the kind of business you can pick up for a song. You may try a venture fund, a private lender, your own lawyer or accountant, your in-laws and of course, banks.
If you are convinced that you are bidding for a potentially lucrative business—pull out all stops to find the money. In some cases you may not need as much capital as you first thought. If machinery, vehicles, or any sort of equipment is required, it may be purchased secondhand rather than new. Frequently these can be leased or bought on terms. Companies that sell costly new machinery often have a low interest payment plan.
Another option may be the business development bank and government sponsored/guaranteed small business loan programs, such the SBA (Small Business Administration) backed loans in the United States. Keep in mind though, the rate of interest charged on these loans is higher than on a conventional bank loan. Check it out carefully. Your accountant will be in a position to fill you in on the latest wrinkles. In situations where you can demonstrate to the lender your knowledge of the business and project cash flow, you’ll get the money.
Whenever you want to obtain a loan, it is smart to provide the potential lender with your business experience. Prepare a one page history subtitled, “this is what we are,” and make sure that the last line of the tale ends on an upbeat note.
Naturally, no matter how little or how much profit had been generated by the vendor, you'll assume that you will do better. If, let us say, you are interested in a music store in a shopping mall where you are totally dependent on passing traffic—you are certainly restricted. But, if you have your eye on a printing business located in an industrial unit and one partner beats the bushes for business while the other puts in time at the presses, it is a different story. Any business where you can go out and hustle can be improved dramatically in a relatively short time.
One last thing: ignore the vendor's declarations (by nod or wink) that the business throws off a lot more profit but this can't be documented because of tax implications. “We are men of the world”', he says.
You've waded through all this and bought a business. You are apprehensive, but elated. I hate to tell you this though: you'll find the actual running of the business anticlimactic.
Manny Drukier has been in business, from manufacturing to publishing, retail to real estate, stocks to stockpots for the past 60 years. He is the author of two books and resides in Toronto, Canada.
