Expand My Business

 Buying a Business, Merging and Franchises 

Many people enter the business community by purchasing an existing business or buying into a franchise. Many existing businesses will also acquire their competitors as part of their strategy to expand. Below are some issues to think about, and common issues when buying into an existing business.

First Steps

  • Begin by finding out about the overall health of the business you are considering buying by talking to the business’ customers and suppliers.
  • Ask to review the financial statements and tax returns of the business you wish to purchase from the last 3 years.
  • Have a good understanding of how you will finance the business and review your plan with your accountant or financial professional.
  • Ask your attorney to develop, and have your accountant review, a written purchase and sale agreement which shows:
    • The terms, rates, and conditions of sale
    • Total purchase price and itemized components (including down payments, and how the price will be financed).
    • How the business will be conducted until purchase
    • Any liabilities you are assuming including accounts payable, loans, leases, contracts, taxes, or legal fees.
    • A clear statement that the purchase and sale agreement are subject to financing and inspections.
  • You should also consider including who will pay for closing costs including legal services, points, appraisals and environmental inspections.
  • Lastly, you should be aware that if you are purchasing or merging with a retail business that has a tax liability, you are responsible for withholding a sufficient portion of the purchase price to cover the liability until the former owner produces a receipt from the Kentucky Department of Revenue for the taxes owed.

Buying a Business

Mergers

  • Merging when a competitor company is bought out and closed - The business which is closing will need to file a 10A104 form with the Kentucky Department of Revenue, and file final corporate tax returns. The closing business will also need will also need to file Articles of Dissolution with the Secretary of State’s Office; additional steps can be found in the Exiting/Changing Over section of the Kentucky Business One Stop. The purchasing business entity will need to file Articles of Merger with the Secretary of State’s Office. The purchasing company will need to make sure that it is registered with the Department of Revenue, and file an amended registration if either the tax or legal structure of the business changed as a result of the merger. See KRS 271B.11.
  • When competitors merge to create one new company - If both companies will close to open a new joint venture, then both companies will need to formally close their business accounts with the Department of Revenue and Secretary of State; additional steps can be found in the Exiting/Changing Over section of the Kentucky Business One Stop. Depending on the legal structure of the new business, you will need to file a Statement of Merger or Articles of Merger with the Secretary of State’s Office, see KRS 271B.11, or contact the Secretary of State’s Office for additional assistance.
  • When a subsidiary company is purchased from a competitor - If the parent company of the subsidiary will still continue to operate, then there are no formal notices or changes which have to be given to the Department of Revenue or Secretary of State’s Office by the parent company. The company which is purchasing the subsidiary may need to complete the 10A104 Update or Cancellation of Kentucky Tax Account(s) form to add the new location information to their existing accounts. If the subsidiary being purchased had not previously conducted business in Kentucky, then the new owner would need to complete the remaining steps under the Start Section of the Kentucky Business One Stop.

Franchises

Buying a franchise can be appealing for many people looking to get into business. In a franchise, the franchiser owns the right to the business name and products and sells that right to you. In return, you sell the products and services supplied by the franchiser. If you are considering buying into a franchise, enlisting the services of a qualified attorney, perhaps one specializing in franchise law, as well as an accountant should be strongly considered.

With a franchise, you get an established business presence. And since many of the decisions and products come from the franchiser, your risks are reduced. You are also provided with a range of support services, such as site selection, training, supplies and advertising/marketing plans. With those advantages however, there are some issues that a potential franchisee should be aware of as well. You are typically bound by the franchisor’s rules and will not have complete control over the business. The franchiser will detail many of the management practices that you will be required to follow. Usually the biggest obstacles to overcome deals with financing and in some cases an upfront franchise fee and ongoing marketing fees are required. There may also be some personal criteria that a potential franchisee must have to be considered for a franchise, such as a certain personal net worth, a minimum number of years of industry experience, etc. Both the US Small Business Administration and Federal Trade Commission have resources to help you in making your decision.

You should know that the Federal Trade Commission requires sellers of franchises and other business-opportunity ventures to provide a Disclosure Document to prospective buyers. In it, you should find detailed information that explains how business between you and the franchiser will be conducted. The Disclosure Document must be given to you in advance so you can gather and consider any and all information you need to be sure your decision is an informed one.

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