What to Know Before You Buy or Sell a Business

Mergers and acquisitions can feel overwhelming, whether you are considering your first purchase or preparing to sell a company you built. A little planning early on makes a big difference. Here are four things worth thinking through before you buy or sell a business.

Can You Afford to Buy a Business?

Start with the numbers. Do you have the cash flow to fund the purchase, and how much can you afford? Talk with your accountant and your bank. If you already own a business, make sure you understand your financial situation fully. If you don’t, clarify your finances and what a purchase will do to them. When you need help finding out what is available in the market, a business broker can help you identify opportunities that fit what you’re looking for.

Asset Purchase vs. Stock Purchase

How a deal is structured affects both your taxes and your risk. For the buyer, an asset purchase is more beneficial. You can take depreciation and amortization on what you buy, which creates tax deductions, and you only buy the assets you know about. You do not assume the seller’s liabilities. For example, if a product might cause harm in the future, that liability stays with the seller.

A stock purchase works the opposite way. You are buying the company’s stock, so you take on all of its liabilities, and you do not get the benefit of those write-offs.

Give Yourself Time to Maximize Business Value

If you plan to sell, your timeline matters. A 60-day timeline isn’t realistic, and how far out you are shapes what you can do to put your business in a better position. Buyers usually look at three to five years of financial health. When you are three to five years out, you have room to correct anything holding back the full value of your business. When you are only one to two years out, you have little time to change what is already in the past.

You want top dollar, and you want the deal to close. Planning ahead helps you catch avoidable problems before they put a sale at risk.

Picture Life After the Deal

If you are selling, think about what your life will look like once the sale closes. What will you do with your time? Retirement may sound appealing, but many owners find they want something meaningful to do every day after an initial break of six months to a year. Ask yourself whether you have enough money, enough time, and a sense of purpose.

Buyers have questions to answer too. Consider the time you will need to put into the business, the money you will invest, and the purpose behind the purchase.

Prepare Before You Buy or Sell a Business

The right approach depends on your timeline and your goals. Whether you are weighing a purchase or getting ready to sell, talking it through with your accountant early gives you the clearest picture of where you stand and what to do next. If you’re considering a move like this, reach out to our team at CJG Partners. We’re happy to help you think it through.