Facts You Need to Know When Buying a Business

8. How can I get a business valuation?
The Business Broker, or possibly your CPA, can help you with valuation. If a professional intermediary is marketing the business, ask them if a third party valuation has already been done. Only specialists certified to appraise businesses should be doing true business valuations. Many small businesses are not actually valued, but rather priced using market information, rules of thumb, and experience. Ask the broker how the business was priced.

9. When I buy a business, how is Goodwill determined?
Goodwill is the difference between the selling price and the estimated values assigned to all the assets, not including the goodwill. The seller's asking price will be broken down into its various components such as equipment, inventory, furniture, accounts receivable, (if being purchased) miscellaneous assets, assumed liabilities (if agreed upon), possibly real estate. The mathematical difference between the sum of all these other assets and the selling price by definition equals the goodwill. Goodwill is a highly valued asset in any on-going business. Think of Goodwill as the "profit-generating intangible" that makes that business worth more than a start-up with no current customers, no employees, no name recognition, no established vendors, no distribution system, no lessons-learned, no mentor to help with the transition, etc etc. It is the "going concern value." Fixed assets without the goodwill are just non-productive equipment and furnishings.

10. What is the correct sequence, order of the assets, when allocating the sales price in a business acquisition?
This is one of the many areas in which you should consult your tax consultant and/or CPA. IRS Form 8594 is used to allocate the sales price over the purchased assets. The buyer and seller must each file this form, and they must agree. On Form 8594 there are 5 classes. The assets are allocated from class 1 through class 5. Class 1 = cash type assets such as bank accounts. Class 2 = assets such as CD's US government securities, foreign currency and readily marketable securities or stock. Class 3 = all tangible and intangible assets that are not class 1,2,4 or 5 such as furniture and fixtures, land, buildings, equipment, and accounts receivable. Class 4 = all intangibles except goodwill and going concern values. Class 5 = the goodwill and going concern value.

11. How do I deduct the cost of Goodwill I purchased with the business?
There is no simple answer or formula for evaluating this since The Tax code is always changing; so consult a professional on these matters. Currently, the cost of business intangibles such as Goodwill, covenants not to compete amounts, and trademarks are amortized over a 15-year period.

12. How do I deduct the value of the customer list I purchased?
The Tax code is constantly changing; so always consult a professional on these matters. Currently, customer lists cannot be deducted in full at the date of the purchase. Generally, the fair market value of the customer list must be amortized over 15 years.

13. How do the parties allocate the purchase price of a business to various assets?
The CPA of the buyer & seller are usually involved with the allocation of the assets to the purchase price. When a business is acquired, the business being purchased can include various assets including machinery, inventory, fixtures and intangible assets. The breakdown of these assets is important because certain assets can be depreciated or written off faster than others. Often one allocation will tend to favor the seller or the buyer.

In many instances, especially with the intangible assets, this allocation is somewhat negotiable, and is sometimes used as a bargaining tool. The IRS will verify that the seller and buyer have done an identical allocation, so the parties must agree upon it. You should work with your CPA to be sure you understand the tax implications of the final allocation.

14. What should I know about accounting and bookkeeping?
The importance of keeping adequate, legible, complete records cannot be stressed enough. Without records, you cannot see how well your business is doing and where it is going. This is your feedback mechanism and "report card." All business transactions should be documented with checks or credit cards. Undocumented cash transactions should be avoided if possible. At a minimum, records are needed to substantiate your tax returns under federal and state laws, including income tax and social security and sales tax laws. It also is necessary to substantiate your request for credit from vendors or loans from lending institutions. If you ever plan to sell your business, you will need to substantiate your representations and claims about the business. Speak to your local CPA to set you up on a good bookkeeping system. There are many good software programs that allow small business owners to keep their own books without being an accountant themselves. The IRS also has a wealth of information on their web site that helps small business owners to understand their record-keeping and tax obligations.

15. Can I make a tax free like kind exchange of the Goodwill purchased with my new business?
No. You cannot make a tax free "like kind" exchange of goodwill from one business to another.

16. When I buy a business, do I sign personally?
You may not want to sign personally to guarantee payment on a business purchase. It will be very rare if you don't have to. The seller or the bank will usually request your personal guarantee on any note. The more money down and the more collateral at risk, the less likely your personal signature will be required. A good CPA can negotiate and work with your lawyer to minimize your personal exposure.

17. After I buy my business, what form do I file to apply for an Employer Identification Number (EIN)?
FileForm SS-4. Ask your local CPA for a copy of the form, or you may download the form from the IRS web site at http://www.irs.treas.gov You may also call the IRS and apply over the phone at 1-800-829-1040.

18. Can I defer the Gains on the Sale of My Business by Buying Another One?
You should consult a tax consultant specializing in these transactions before considering this option. There is a possibility of deferral of gains on sales of certain types of corporate stock under Section §1045. Section §1045 essentially works like the old capital gains rules for the sale of a primary residence. Specifically, §1045 allows non-corporate taxpayers to defer (elect to rollover) the gain onthe sale of Qualifying Small Business ("QBS") stock if the gain is invested in another business. Similar to the old law that applied to the sale of personal residences, the basis of the replacement QSB stock purchased must be reduced by the amount of gain that has been deferred.

This is a very brief overview of the complex rules under §1045. You should consult a CPA before thinking about this possibility. Please note: A Business Broker is not authorized to give you actual legal or accounting advice. Be sure to consult an attorney or CPA for advice in a business purchase or sale.

Before you Buy or Sell a Business consult the professionals at Business-USA!