Business Law

How to Purchase a Small Business Wisely

People planning to buy a small business have several methods to choose from. You can simply buy the business' assets, for example, and transform them into your own business. You can also purchase shares of the target company or merge your company with the other company. You can even buy a franchise.

Asset Purchase Avoids Debts

If you buy another company's assets, you must be careful to properly value the assets you are buying, especially intangible assets such as consumer goodwill. You need to transfer title to any titled assets such as bank accounts, real estate, and automobiles, into your company's name. Although you generally don't assume any of the debts of the company whose assets you are purchasing, some exceptions exist. If you buy real estate with a mortgage, for example, you will take the property subject to the mortgage. This means that the bank still owns a portion of your new real estate. In an asset purchase, the target company will be taxed on the sales proceeds.

Stock Purchase Includes Debts

You may buy all of a target company's stock or only a majority interest. If you own a company that buys the shares, the target company will become your company's subsidiary. You can then use your shareholder voting power to name directors and officers, giving you effective control of the company's operations. The acquired company will still hold all of that company's assets in its own name. A target company may be more willing to authorize a share purchase than an asset purchase. This is because it will not be taxed on sales proceeds, and because target company shareholders can pay lower tax rates on any profits they earn from the sale.

A Merger Combines Two Companies

In a typical merger, one company, designated as the "surviving company," issues new shares and uses them to buy the shares of the target company. It then takes title to the target company's assets and dissolves the target company. In this way, the target company's shareholders become shareholders in the surviving company. In many cases, the surviving company is renamed. One advantage of a merger is that target company shareholders are left with an ownership stake in the new company.

Buying a Franchise Does Not Require a Takeover

Purchasing a franchise means that you buy the right to use the trademarks and other intellectual property owned by a company that has an established business reputation. By purchasing a Starbucks franchise, for example, you are buying the right to use Starbucks' name, logos, and coffee formulas. However, you will have to accept restrictions on your business operations. You may be forbidden to sell any products except franchise products. You may be forbidden to advertise independently. You must pay the franchisor a one-time franchise fee plus ongoing royalties based on a percentage of your sales.

A Business Lawyer Can Help

The law surrounding purchase of a small business is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.

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