Buying an Existing LLC: Everything You Need to Know
Buying an existing LLC can be tricky because it is a hybrid of sorts so it's wise to do an enormous amount of research on the corporation prior to buying.3 min read
Updated November 11, 2020:
Buying an existing LLC can be tricky because an LLC is a hybrid of sorts. It offers its owners, otherwise known as members, the legal safeguards of a corporation while maintaining the management style of a partnership.
Before you consider buying an existing LLC, it's wise to do an enormous amount of research on the corporation. You'll also want written contracts that spell out every finite detail of the agreement.
Purchasing a Small Business
Purchasing a thriving small business is an enticing investment. It can be done in two different ways.
- Setting up a new LLC
- Purchasing the existing LLC outright
If you're planning on keeping the LLC structure, you may want to set up a new LLC that purchases the assets of the existing one, or you can purchase the existing LLC outright. This process is sometimes referred to as a bulk purchase.
Steps to Buying an Existing LLC
Here's a step-by-step guide to buying an existing LLC:
- Find the Right Business: Start by networking with your local chamber of commerce. Also, you may want to check out various trade groups for the industry you're interested in. Business newspapers and trade publications will be great sources of leads.
- Start Negotiating: Initiate a conversation with someone who's authorized to negotiate on behalf of the business. Make sure you can learn as much as possible about the business before making any decisions. When you're ready to get serious, ask the business owner for access to the business' books. Don't be surprised if they, in turn, ask you for a financial statement as evidence of your ability to make the purchase.
- Carry Out Due Diligence: Due diligence includes a thorough review of the books. To start, review tax returns, business licenses, leases, mortgages, loans, employee agreement, vendor agreements, and the LLC's operating agreement. Also, search public records for any outstanding mortgages or liens. See if there are any outstanding property tax obligations. How do the revenues look, compared to the expenses? This is a good time to get a lawyer involved in the process, as you'll be examining several complex documents.
- Create a Term Sheet: Terms sheets, or memorandums of understanding, are short documents that outline basic components of the deal. It can be as simple as a statement of the parties' intentions. The basic terms outlined in the term sheet will go on to serve as a blueprint for the formalized contract.
- Draft the Purchase Agreement: This is the time to get specific. The purchase agreement will become a binding legal document, covering everything from the purchase price to the repercussions, should something go awry. In some instances, you may want the seller to sign a non-compete so they won't continue to do business in your industry.
- Conduct Notifications: If you've purchased an existing LLC outright, you may need to notify the state of the change in ownership. If you've purchased only the assets of the LLC, you might want to consider forming a new LLC. This will mean a notification to the IRS, as well as any agencies that will license the corporation.
When looking to start a new business, buying an LLC seems like a nice option. Some of the heavy lifting has already been done, but don't let that fool you. Be sure to investigate any business you're interested in buying and be willing to keep looking if it appears to be a bad deal.
Purchasing the Business' Assets
Many first-time buyers will choose to purchase the business's assets. There are two main reasons for this:
- It can limit their liability.
- It can offer significant tax benefits.
By purchasing the business's assets and not the entity itself, buyers potentially avoid hidden liability concerns. When you purchase the entire entity, you're also adopting any pending lawsuits, liens, loans, and more.
As for tax benefits, according to the IRS, a buyer can set the new company's depreciable asset basis. For example, part of your asset acquisition may include equipment. If the equipment is set at a high market value, the taxes may be lower in the first year or two when cash flow is vital to a business's growth.
If you need help buying an existing LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.