@126 CHAP 3 旼컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� 쿞UMMARY CHECKLIST FOR BUYING AN EXISTING BUSINESS� 읕컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� @Q "Trust in Allah. But always tie your camel." @Q -- Ancient Arab proverb INVESTIGATION: . Why does the present owner want to sell the business? . Will the reputation of the business be helpful or harmful if you take it over? . Obtain tax returns, bank deposit records, sales tax returns, and other financial records. Don't buy a "pig in a poke." . If the business is not currently very profitable, why do you think you can run it more profitably than the present owner? . Thoroughly investigate the business's financial re- cords and history, its reputation and any factors that might unfavorably impact on its future. You may need the help of an accountant or other experts. . Review or have reviewed the provisions of key con- tracts, leases, franchise agreements, or any other legal arrangements which have a significant effect on the business. Be sure you are not assuming an unfavorable lease or contract or losing the benefits of a favorable one. . If the purchase involves real estate, make an in- vestigation as to the possible existence of hazardous waste contamination of the property, for which you might be held liable for astronomical cleanup costs. You may even need to hire a firm to do an "environ- mental audit" of the property, to protect yourself. NEGOTIATIONS: . Make sure that the purchase price is fair (to you, at least). Even if it is, can you afford it? Will you have enough working capital to run the business properly after you pay the purchase price? . Insist early on getting accurate financial informa- tion and access to the supporting data. . Push for an allocation of the purchase price to spe- cific assets in the sale agreement. Be aware that you and the seller will each have to file a special income tax form (Form 8594) with the IRS, showing how the purchase price was allocated. So seek to maximize the amounts allocable to depreciable assets and any non-competition covenant; seek to minimize allocations to "goodwill" or land purchased (at least under present law -- this may change under anticipated 1993 tax legislation that would allow a write-off of "goodwill" over a 16-year period). CLOSING THE TRANSACTION: . Retain an attorney to participate in drawing up the sale agreement. DON'T TRY TO "WING IT" ON THIS ONE! . Comply with the requirements of the state Bulk Trans- fer Act if it applies to the particular type of busi- ness being acquired, under @STATE law. . Be sure the acquired property is not subject to any recorded security interests or other liens beyond those disclosed by the seller. . Have the seller obtain and furnish a certification that all employment taxes due have been paid. . Have the seller obtain and furnish a certification that all sales and use or gross receipts taxes due have been paid (in states where such taxes are ap- plicable to the seller's business). . Seek to hold back part of the purchase price as se- curity to indemnify you for any misrepresentations as to assets or liabilities by the seller. . Obtain representations by the seller that any real property involved in the sale is not contaminated by hazardous substances that might result in Superfund cleanup liability, and have the seller agree to in- demnify if such substances are later found. OTHER TAX CONSIDERATIONS: . Determine if the sale of the business will result in a sales tax liability with respect to part or all of the purchase price. (In many states, such a sale may be exempt from sales tax as an "occasional sale.") @CODE: CA In California, the sale of a business is often taxa- ble, however, with regard to certain tangible assets. @CODE:OF If the sale will be taxable, is there a way to re- shape the transaction to reduce or avoid sales tax? For example, allocate more of the purchase price to assets not subject to sales tax, less to assets that are. . Remember that recent changes in the tax law require both the buyer and seller in such a transaction to file Forms 8594 reporting certain information about the sale price and allocation. Be sure that you and the seller are going to report the SAME numbers on the two forms you and the seller file, respectively. Also, don't forget to file your Form 8594 regarding the transaction....THE PENALTIES FOR NON-FILING CAN BE STUPEFYING, HORRENDOUS, OUTLANDISH.... . If you are buying a corporation that has not been paying income taxes because it has carryovers of net operating losses or investment tax credits, be aware that you will be able to use only a small portion of those carryovers to shelter the income of the busi- ness once you become the owner. After 1985, in gen- eral, if there is more than a 50% change in the owner- ship of the stock of a corporation that has tax loss or tax credit carryovers, only a certain amount of those carryovers, equal to the yield on long-term tax- exempt bonds (about 6 or 7% in recent years), multi- plied times the value of the "loss" corporation at the time of the acquisition, may be used each year to offset taxable income for all tax years ending after the change in ownership. . If the seller has a favorable "experience rating" for unemployment tax purposes, make sure you act on a timely basis after the purchase to succeed to that rating as a successor employer, under the state unem- ployment tax law of @STATE. @CODE: CA @CODE:NF . In California, make the application to succeed to the seller's unemployment tax experience rating on E.D.D. Form DE4453. . In California, have the seller obtain an employment tax release, (Form DE 2220) from the California Employment Development Dept., certifying that all employment taxes due have been paid by the seller (so you won't become liable for them). The seller should also obtain a sales tax release or "Certifi- cate of No Tax Due" from the State Board of Equal- ization. . California also requires that, if you purchase a business that owns real property within the state, you must report the change of ownership to the county tax assessor(s) on a timely basis. As a result, your real estate taxes may be much higher than the seller's, when the property is re-assessed at its higher current value, rather than the Propo- sition 13 assessed value upon which the seller's tax was based.