Newland's Business Notes

Business Detective Work Ė Part II

Volume 9 Issue 3 -- May/June 2005

Note: The following version of this newsletter contains some additional material not included in the printed version.

In the last issue, we began our look at the detective work necessary before purchasing a business.  This time, we will conclude by considering other factors to investigate.

It is important to find out about the businessís payment of taxes, particularly if the stock of a business is purchased. If you purchase stock, you are purchasing the business entity itself, and any liabilities of that entity, such as for unpaid taxes, will continue to be liabilities of the business after the purchase.

Even if you are purchasing only assets, there can still be unpaid tax liabilities that could impact you, the buyer. In Virginia and perhaps other states, there are laws that cause the purchaser of the assets of a business to be responsible for certain tax debts of the business.  For example, a buyer of assets may be liable for any unpaid Virginia sales taxes of the seller. 

For this reason, it may be a good idea to get a tax clearance certificate from the appropriate state officials. 

Evidence of unpaid tax liabilities, whether federal or state, can show up in the filings at the appropriate court house. You should check the court house records for any outstanding tax liens or judgments. Any liens or judgments could result in a claim against the businessís assets that might have to be paid by the purchaser of the assets after the sale.

While you are at the court house, there are a number of other things to check.  For example, you can check the court records to see whether the business is a party to any ongoing litigation.

You should also check to see whether any liens or securities interests have been filed against the businessís assets in the state records.  In Virginia you can do this by contacting the State Corporation Commission or checking on their website.

If the business has inventory, special checking may be required in order to comply with statutes applicable to what are called ďBulk Sales.Ē

Another important business tool is a business plan. Very few small businesses have business plans but on the outside chance that one exists, you would want to see a copy of it.

Protecting What Is Yours

Of course, as we all know, training cats can be very difficult.  Since Cat-Os has stumbled into a valuable and secret  method of disciplining cats to make them behave very much like border collies, the trade secrets are quite important.  Are the trade secrets themselves adequately protected through proper controls and  non-disclosure agreements? If there are employees, it is critical to determine if the employees have covenants not compete in order to protect the valuable secret method of training cats.  Employee manuals, if any, should be carefully checked. 

You would also want to be aware of how long the employees have stayed at Cat-Os.  Since the cats get very frustrated being trained, they sometimes scratch the employees. Other factors can adversely affect employee morale. The longevity of the employees (or how much employee turn-over) and employee insurance claims could be important factors which you would want to consider.

In addition to finding out how employees view the business, also try to find out how the customers view the business. Spend some time visiting with cat owners to see if they=re pleased with the results and if the cat training has, in fact, worked as claimed by the sellers of Cat-Os. 

It is widely known that cat bites and cat claws can inflict considerable damage.  Check to see what Worker=s Compensation claims have been filed or are outstanding. You should also try to determine the costs of obtaining insurance to protect against such risks. 

If a business provides unusual pricing arrangements or discounts, you need to know about that  in order to deal with future users of the service.  For example, if Cat-Os is consistently giving discounts for cats that misbehave, this practice could affect the businessís profitability. 

Don=t Be Cavalier

Some would-be business owners are motivated the same way that some car purchasers are motivated.  They have decided that they will buy a particular kind of car and that it must have certain features.  Rather than checking with various dealers and reading literature about car manufacturers, the purchase will be somewhat impulsive.  

Many businesses are purchased the same way, particularly if it=s a business in which the buyer has not worked before and is infatuated with it.  For example, if the buyer is a cat lover, he or she might agree with the concept that cat obedience is a service to the world and worth paying a substantial premium for it, even if the economics of the business does not justify it. 

In the end, nothing replaces good detective work when it comes to buying a business.  If you need assistance in this regard, you may want to contact our firm.

Copyright 2005

Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.

While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.

Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.

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