How to Buy an LLC
A new entrepreneur may find it difficult to establish an LLC from scratch. Another option is to buy an existing limited liability company.
Before purchasing an LLC, you should conduct thorough research to ensure that you understand what you’re getting and how much it should cost.
You’ll also need written agreements that detail every aspect of the transaction. Following these steps increases the likelihood that your entrepreneurial dream will become a joyful reality rather than a financial and legal disaster.
1. Find a Business to Buy
Of course, the first step in purchasing an LLC is to locate a for-sale business. This may not be as simple as it sounds, because business owners who want to sell or retire rarely advertise on Craigslist.
Consider networking through your local chamber of commerce or a trade group for the industry you want to work in. Trade publications and business newspapers may also provide leads. You could also look for older business owners who are about to retire.
2. Begin Negotiations
You can begin negotiations once you’ve found an LLC to purchase. Make certain that you are dealing with someone who is authorized to negotiate on behalf of the company.
You’re not trying to close a deal at this point. Your goal is to start a conversation so you can learn as much as possible about the company before deciding whether or not to buy.
You should request access to all of the company’s books and records from the current owner.
You may be required to provide the owner with a financial statement to demonstrate your seriousness and ability to purchase the business, and the owner may also require you to sign a confidentiality agreement prohibiting you from disclosing information about the business to anyone other than your attorney or financial advisor.
3. Due Diligence
You wouldn’t buy a house without first getting a home inspection and a title report, and you should not buy an LLC without knowing everything you can about its financial situation. Due diligence is simply the process of thoroughly reviewing the records of a company.
What should you be looking for? Accounting books and ledgers, tax returns, leases, loans, mortgages, the LLC operating agreement and LLC articles of organisation, employment agreements, vendor agreements, and business licences are all examples of documents that fall under this category.
- You may also need to look up mortgages, liens, or property tax obligations in public records.
- What exactly are you looking for? You want to know about the company’s assets and liabilities.
- What are its earnings and losses? Have profits increased or decreased, and why? What are the terms of any leases, loans, or mortgages, and can or should you take them over? Is the sale of the LLC restricted by the operating agreement?
- Due diligence will almost certainly entail reviewing some complex documents.
Legal documents, in particular, can be lengthy and difficult to comprehend, but you must understand what they say if your LLC purchase is to be successful. As a result, hiring a lawyer to assist with some or all of the due diligence is a good idea.
4. The Term Sheet, or Memorandum of Understanding
You can continue to negotiate with the business owner while conducting your due diligence. You have the option of purchasing the LLC as a whole or just its assets. You should start outlining what the purchase will and will not include. You may also agree on a preliminary purchase price and payment terms.
These kinds of details are usually outlined in a term sheet or memorandum of understanding. This is a brief document that outlines the essential elements of the purchase agreement.
It confirms the parties intentions and acts as a framework for a more formal contract. The assistance of an attorney is beneficial because an attorney can advise you on what should be included and what terms are reasonable.
5. The Purchase Agreement and Related Documents
When you have completed your due diligence and reached an agreement on the major points of the transaction, it is time to write it down in a purchase agreement.
A purchase agreement is a formal legal document that covers everything from the purchase price to what you’re buying to your options if something goes wrong. The purchase agreement will be signed by both you and the seller.
Other agreements may be required as well. The business landlord, for example, may require you to sign an assignment or negotiate a new lease. You may want the business seller to sign a non-compete agreement.
6. Notifications
If you purchased the LLC rather than just its assets, you may need to notify your state that the LLCs ownership has changed.
If you are not keeping the same registered agent listed on the articles of organization, you must notify the state of your new registered agent’s name and address. If you only purchased the LLC assets, you should form a new LLC or corporation if you haven’t already.
You should also notify taxing authorities and any organizations that issue licenses to the LLC.
If you want to start a business, purchasing an LLC can be a good alternative to forming your own. However, don’t let your entrepreneurial zeal get the best of you.