Small businesses in the Estes Valley often change hands between people who already know each other: an owner and a longtime employee, two neighbors, or parents and their children. Whether you are the buyer or the seller, these are the ten things both sides should understand before anyone signs.
1. Decide what is being sold. A buyer can purchase the business’s assets (e.g., the equipment, inventory, name and customer list) or buy the company itself. Sellers usually prefer to sell the company; buyers usually prefer to buy the assets, because the company’s old debts and problems stay behind. Settle this first, since nearly everything else depends on it.
2. The numbers have to hold up. Sellers should gather three years of tax returns and financial statements before going to market. Buyers should ask for them, read them with a CPA, and be cautious of income which “doesn’t show up on the books.”
3. Start with a letter of intent. A short, mostly non-binding summary of the price and main terms lets both sides confirm they agree before paying for a full contract.
4. The lease can make or break the deal. For a restaurant or shop, the location is often most of the value. Find out early whether the lease can be transferred and on what terms, because the landlord usually has to agree.
5. Licenses may not come along. Liquor licenses, short-term rental licenses and some permits do not transfer automatically. The buyer may need to apply for new ones, and that can take time.
6. Unpaid taxes can follow the business. Colorado sales taxes the seller owes can become the buyer’s problem. Buyers should ask for proof that the seller’s taxes are current, and sellers should be ready to provide it.
7. Seller financing needs protection on both sides. If the seller is being paid over time, the seller needs a promissory note and a security interest in the business, and the buyer needs clear terms on payments, default and early payoff.
8. A promise not to compete has to be written down. Colorado sharply limits noncompete agreements, but allows them as part of the sale of a business. A buyer who wants the seller to stay out of the market should say so in the contract, and a seller should understand what they are agreeing to.
9. Plan the handoff. Decide how long the seller will stay on to train the buyer and introduce customers and suppliers, whether the seller is paid for that time, and what happens to the employees.
10. Get tax advice before you sign. How the price is divided among equipment, inventory, goodwill and the seller’s promises changes the taxes for both sides. Bring your CPAs in before the purchase agreement is final.
Elkhorn Law can represent the buyer, the seller, or (with both parties’ written consent) both. See Business Sale or Purchase.
This page is general information, not legal advice. Talk with an attorney and a CPA before buying or selling a business.
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