Most people think of starting a new corporation as beginning a business from scratch. But that’s not the only purpose of creating a corporation.
Starting from scratch involves developing an idea into a company. This takes time to build a customer base from deploying a marketing strategy. It also means hiring the right employees and having enough cash flow to pay them while you grow the business.
Buying an existing business is another reason to create a new corporation. Normally, buying an existing business means assuming the liabilities of the former owner. That’s not the case when you buy only the assets of the business. To do that that, you create your own new corporation and acquire the assets of the existing company, whether or not it is incorporated.
You have no concern about liabilities of the seller because you aren’t taking ownership of the existing business. Instead, your new corporation is the successor to operating the business. The seller retains responsibility for payment of liabilities incurred in the predecessor operation. You are indemnified of the seller’s liabilities by only acquiring the business assets.
Eliminating the liability risk of a former business owner is important. After all, the reason for buying an existing business is that doing so is less risky than starting from scratch. When buying the assets of an existing business, careful inspection of inventory is required. You want to know what inventory is on hand along with its condition and age. Next, make sure that all equipment is in good working order. Ask for maintenance records. Assign market values for inventory and equipment based upon the alternative of purchasing them from other sources.
In an asset purchase, you are taking over the reputation, customers, and employees of an existing business. That can be a positive if the business has a sound reputation, loyal customers, and committed employees. In addition to inventory and equipment, you are acquiring the customer list and sample documents used in business. Make sure there is value in the procedures, systems, and forms that are provided in an existing business. You want to avoid the necessity of creating these business features by yourself.
Having your corporation acquire an existing business involves evaluating the current employees and procedures. This is as important as examining hard assets because these intangibles are part of the purchase price you pay.