Purchasing an LLC is an elaborate task, but with the right expertise, it becomes a process that’s both manageable and profitable.
As seasoned financial advisors, we’ve walked this path time and again, helping clients strike fair deals that align with their financial objectives.
In this guide, we clarify the intricacies of the LLC purchase agreement, due diligence, and legal documents involved, and underscore the significance of understanding the operating agreement, business licenses, and personal assets.
Moreover, we’ll delve into assessing the financial health of the LLC, mitigating personal liabilities, and evaluating the long-term viability of your investment.
So, let’s see how to buy an LLC the simple way.
Brief Overview
- When purchasing an LLC, you need to follow the steps imposed by the law to make sure the transaction complies with state regulations.
- The advantages of acquiring an LLC include established operations, a customer base, a business model, and experienced employees.
- However, be aware of potential disadvantages like hidden problems, clashes in company culture, liabilities, and overvaluation.
- We recommend obtaining guidance from professionals for a successful acquisition.
How to Purchase an LLC: A Step-by-Step Guide
To buy an LLC, first identify a suitable entity. Then, conduct due diligence to assess its financial health. Negotiate terms, sign a purchase agreement, ensure transfer of intellectual property, and finally, file the change of ownership with the state.
We discuss all steps in detail below:
Step 1: Find a Business to Buy
The first step to buying an LLC is identifying a business to acquire. In our experience, business newspapers, trade publications, and your local chamber of commerce are good starting points.
However, networking also plays a crucial role. Express your interest in buying an LLC to your peers in the industry, and you may find opportunities that aren’t publicly advertised.
Things to consider when selecting a business to buy:
- The LLC’s financial history: Do they have a history of stable revenues and profits?
- The LLC’s operations: Does the business have a loyal customer base and a solid market presence?
- The structure of the LLC: Is it a sole proprietorship, or does it have multiple members?
Step 2: Begin Negotiations
Once you’ve identified a potential LLC to purchase, the next step is to initiate negotiations. This is often done through an intermediary, like a broker or an attorney.
In most cases, the current business owner or a designated representative is authorized to negotiate the sale.
Step 3: Create a Term Sheet or Memorandum of Understanding
After initial negotiations, create a term sheet or a memorandum of understanding, which is essentially a formal outline of the proposed deal. We advise all our customers to create this document, as while it is non-binding, it sets the stage for more involved negotiations.
What goes into a Term Sheet:
- Proposed purchase price: This is the proposed price for either buying the entire LLC or only the assets, depending on the structure of the deal.
- Structure of the deal: Will you be buying a limited liability company as a whole or only the LLC assets?
Step 4: Complete Due Diligence
With a term sheet in place, you now transition into the due diligence phase. This is arguably the most critical part of buying an LLC. It’s during this phase that you’ll gain an in-depth understanding of the business’s financial health, legal standing, and overall viability.
What to look for:
- Financial statements: Review the most recent financial statement and the LLC’s tax returns for the past few years.
- Legal documents: Ensure the LLC’s operating agreement, articles of organization, and any employment agreements are in order.
- Assets and liabilities: Conduct a thorough examination of the LLC’s assets, bank accounts, and current outstanding debts.
Step 5: Finalize Your Purchase Agreement
Once due diligence is completed and you’re satisfied with your findings, the next step is to finalize the membership interest purchase agreement. This is a formal legal document outlining the specifics of the purchase and is typically drafted by an attorney.
What goes into a Purchase Agreement:
- Purchase price: This is the final agreed-upon price for the LLC or its assets.
- Payment terms: These are the terms outlining how and when the payment will be made.
- Other agreements: This includes any other agreements made between the buyer and the seller.
Step 6: Close on the Purchase
The final step of the purchase process is closing the deal and making the necessary notifications. You’ll need to notify the federal government about the change in ownership and may also need to notify any other relevant parties.
Notifications:
- File the necessary documents with the state where the LLC was registered.
- Notify customers, vendors, and other relevant parties about the change in ownership.
Advantages and Disadvantages of Buying an Existing LLC
There are both advantages and disadvantages to buying an existing LLC that prospective buyers should consider.
Advantages
- Established operations: Buying an existing LLC means acquiring a business entity that’s already up and running, eliminating the hassle of starting an LLC from scratch. This includes legal services, drafting LLC articles, and navigating the formation process.
- Existing customer base: An existing business structure comes with an existing customer base, providing immediate revenue. According to a study conducted by Harvard Business Review, it is enough to increase customer retention rates by 5% can boost profits from 25% to 95%.
- Proven business model: With an already-functioning limited liability company, the business model has been tested and proven successful, reducing risk for new LLC owners.
- Employee experience: In our hands-on exploration, we’ve noticed that inheriting experienced employees from older business owners can be a major advantage as they have a deep understanding of the business and its operations.
Disadvantages
- Hidden problems: An already-functioning LLC may have hidden issues that aren’t immediately apparent. For instance, there could be tax obligations or legal problems that become your responsibility upon purchase.
- Culture clashes: When a new entrepreneur takes over the LLC ownership, clashes in culture and management styles can lead to employee dissatisfaction or turnover.
- Outstanding liabilities: Our research shows outstanding liabilities like debts, lawsuits, or tax liens that the new owner must assume responsibility for.
- Overvaluation: A study published in The Business Lawyer has shown that many business owners often overvalue their companies, leading to potential overpayment when purchasing an LLC.
Takeaways
Despite all the challenges, purchasing an LLC can be a viable pathway for entrepreneurs to own a business, generate profits, and gain valuable experience in the business world.
We recommend consulting with appropriate professionals, such as an attorney or financial advisor, since they can provide personalized guidance on selecting the right business entity for your circumstances.
Also, ensure your asset purchase agreement covers all aspects to protect your interests. Once you buy an LLC, make sure to check out our list of the best registered agents in the US, which can help you stay compliant with state regulations and avoid fines.
Frequently Asked Questions
Often, the most expensive part can be the legal fees associated with drafting the formal legal documents needed, like the LLC operating agreement and articles of organization.
Yes, several online services facilitate the purchase of an LLC. However, due to the complex documents and legal implications involved, it’s advisable to seek professional legal advice and conduct due diligence.
