When deciding to open a business, you may be considering buying a limited liability company. If you invest in an existing LLC, you may want to weigh the pros and cons before buying. An LLC is a popular business structure due to its flexibility and the protections it offers to its owners to shield their personal assets from the profits and losses of the business. But like any investment, there are advantages and disadvantages to buying an LLC, which are detailed more fully below.
What Are the Pros of Buying an LLC?
One of the main benefits of buying an existing business, such as a limited liability company, is that it includes an established business model, operations, roster of customers, vendor relationships, brand identity, and revenue.
Additionally, a limited liability company comes with significant financial advantages. LLCs offer a shield for the personal assets of the owners against the debts and legal actions of the company, limiting your personal risk after the investment. Plus, LLCs provide flexible tax advantages and can be taxed as a sole proprietorship, S corporation, or C corporation, depending on what is most advantageous in the opinion of your financial advisor, to limit personal income taxes.
Finally, it is often simpler to purchase an LLC versus a stock corporation, especially if it is a single-member LLC. Rather than go through the complex legal paperwork of acquiring a company that has been incorporated, your purchase often is as straightforward as acquiring the assets or the membership interests of the other owner, simplifying the business transaction and minimizing the legal expenses in transferring ownership.
What are the Cons of Buying an LLC?
While there may be a number of benefits to purchasing an LLC, versus starting a business from scratch, one of the risks of buying any business are unknown or hidden liabilities.
Additionally, the cost of buying an existing LLC is more expensive than starting a business. This makes sense because the purchase price must cover the physical assets of the business – supplies, furniture, office equipment, inventory, etc. – along with the intangible assets – the business’s brand value, goodwill, etc.
Finally, when you buy an existing business, you may encounter resistance from current customers, employees, or other business operational issues, that need to be addressed following the change in the ownership of the company. The business may also have existing leases, contracts, and other debts, that you need to review and honor following the acquisition.
How to Buy a Limited Liability Company (LLC)
Here are the steps to buy a limited liability company (LLC). Note, that not every transaction will proceed in the manner below. However, this outline covers the main steps you will take when you decide to buy an LLC from an existing business.
Initial Research
Before you decide to buy, you will conduct research on the various industries, markets, locations, and business sizes, that align with your investment goals. Many buyers will use an online marketplace, business broker, or personal network, to identify opportunities.
Preliminary Assessment
Then, once you have narrowed your list of potential purchases, you may wish to engage a legal advisor to approach the business to make a preliminary assessment of its investment potential. The parties agree to review financial statements, customer information, and business operations, to make inquiries into the viability of the business and its value.
Letter of Intent (LOI)
After you have decided to make an investment, you can communicate your offer to purchase with a Letter of Intent, which is a non-binding document outlining your intention to buy the LLC and the basic terms of purchase. Often, the Letter of Intent will include an NDA or other confidentiality provisions in order to proceed to the next step, due diligence.
Due Diligence
Once the parties have signed a letter of intent, they may agree to conduct due diligence about the business, including its assets and liabilities, prior to engaging in a sale of the LLC. This may include reviewing financial records, contracts, employee files, and other items that reflect the value of the business and any potential risks.
Negotiate Terms and Close the Sale
After due diligence, the buyer and seller will need to reach an agreement on the terms of the sale, which may include securing financing; seller financing; loans; cash; exchange of stock or other assets; and, any transition assistance, warranties, non-compete agreements, or other terms, to protect the buyer during and after the buying the LLC. The parties will then prepare a Purchase Agreement covering the terms of the sale.
What to Do After Buying a Limited Liability Company (LLC)
Once the parties have reached a Purchase Agreement, they will close on the sale of the business and begin the process of transitioning ownership. This will include assigning contracts, leases, and supplier agreements. You will also need to transfer funds and set up accounts for the new owner, along with notifying employees, vendors, and most importantly of all, customers. You should focus on a smooth transition to protect your purchase and ensure continuity. After all, it is why you have decided to buy an LLC rather than start a business from scratch.
Frequently Asked Questions About Buying an LLC
Here are some of the most frequently asked questions about buying an LLC.
Does the seller need to share information about any debts or liabilities prior to selling?
Yes. Similar to buying a house – where you would usually get an independent inspection done of the home to uncover any defects, etc., that need to be repaired before closing – it is often a good idea to undertake some measure of due diligence before buying a business to discover undisclosed debts, legal issues, or other financial obligations, prior to purchasing the LLC.
How much does it cost to buy an LLC?
Usually, in addition to the purchase price, there are brokerage fees (if you used a business broker to find investment opportunities). There may also be legal expenses associated with transferring the membership interests to the new owners and other paperwork that must often be filed with a state agency.
What is the main reason I would buy an LLC versus start a business from scratch?
The hardest part of starting a business from scratch is generating cash flow, whereas an existing LLC gives you all the benefits of a turn-key operation. Similar to buying a franchise – which itself might be an LLC – purchasing an existing company gives you the benefit of realizing a return on your investment, assuming the LLC is already profitable. By investing in an existing business, you reap the benefits of an existing customer base and goodwill.
