Many find the idea of running a small business appealing, but lose their motivation after dealing with business plans, investors, and legal issues associated with new start-ups. For those disheartened by such risky undertakings, buying an existing business is often a simpler and safer alternative.
The main reason to buy an existing business is the drastic reduction in start-up costs of time, money, and energy. In addition, cash flow may start immediately thanks to existing inventory and receivables. Other benefits include preexisting customer goodwill and easier financing opportunities, if the business has a positive track record.
The biggest block to buying a small business outright is the initial purchasing cost. As the business concept, customer base, brands, and other fundamental work have already been done, the financial costs of acquiring an existing business is usually greater then starting one from nothing.
Most businesses enter into contracts more frequently than they may realize. In almost all business dealings, any time your company agrees to take some action or make a payment in exchange for anything of value, a legal contract has been created. E.g., most bills of sale, purchase orders, employment agreements, and other common business transactions are legally enforceable contracts.
A contract is a legally enforceable agreement between two or more parties that creates an obligation to do or not do particular something. The term "party" can mean an individual person, company, or corporation. No matter who the parties are, contracts always contain the following essential elements:
- Parties who are competent to enter into a contract. E.g., a mentally disabled person or a minor cannot enter into a contract.
- Mutual agreement by all the parties; i.e., all parties have a meeting of the minds on a specific subject.
A traditional Corporation (or "C" Corporation) is an incorporated business structure that creates a new, separate, legal entity that is distinct from its owner(s). As a separate, legal entity, a C Corporation can engage in business, have its own bank accounts, enter into legal commitments, establish its own credit identity, and even acquire property and assets.
One of the chief advantages of being a separate entity is that the owners of the Corporation, known as shareholders, enjoy limited liability protection. This means that their personal assets are shielded from any liability incurred by the corporation, and that they are not personally liable for any legal liabilities resulting from any litigation against the corporation. The extent of their losses is limited to the amount of their investment in the corporation. This type of asset protection and limited liability can be extremely advantageous to the sole proprietor who may be seeking to lure potential investors.
A company is owned by its shareholders. The shareholders appoint the directors who then appoint the management. The directors are the "soul" and conscience of the company. They are liable for its actions. Shareholders are not liable for company actions. Management may or may not be liable for company actions. Often these roles are assumed by the same individuals but as a company grows and becomes larger, this may not be the case.
When a company is created, its founding shareholders determine how a company will be owned and managed. This takes the form of a "shareholders' agreement". As new shareholders enter the picture, they will want to become part of the agreement and they will most likely add additional complexity. E.g., they may want to impose vesting terms and also mechanisms to ensure that they ultimately can exit and get a return on their investment. Not having such an agreement can lead to serious problems and disputes and can result in corporate failure.