Don't over look tax allocation when buying a business

The majority of small businesses are sold as asset sales. This means the seller sells specific assets which often include inventory, equipment, customer lists, goodwill, vehicles, etc. It's not enough to agree to a price for these things, buyer and seller should agree to how the total price is allocated. There are significant tax consequences and risks if you don't do this. The process is called the Allocation of Purchase Price.

For instance, Joe sells his auto repair shop to Mary for $300,000. That's good but now you need to agree on how much of the $300,000 goes to which assets. In particular the seller will be sensitive to any allocation, about book value, of the price to assets that the seller has depreciated already. Why? Because depreciation recapture has bad tax consequences for the seller. Also, the allocation has consequences to the buyer, primarily when the buyer can "write-off: the price of the assets she bought...5 years? 7 years/ 15 years? etc.

Make sure you get professional tax advice and cover all the bases!

Rule 1 in Buying a Business......

Know for certain why you want to buy. Are you mad at your boss? Do you think it's a way to get out of debt? Do you think you can do something better than other people? Do you think you'll get to work less and just count the money?
These aren't good reasons.

Or... do you want to control your destiny and you are willing to live with the results...good or bad.

If this is you it may be worth a shot.

Stay tuned here for tips, hints and secrets of putting yourself in the best position to succeed.

Things to look for in Small Business Loans

Too often small business owners only try to get a small business loan when they have hit a wall and are desperate for cash. When that happens, usually they are so happy to get their hands on some operating capital that they ignore the terms of the loan.

Here's a list of common small business loan terms and things you should consider:

1. Collateral - The loans will often ask for a collateral assignment on all your small business assets and often your personal assets as well. Understand what this means.
   
2. Default - This explains what the rights of the creditor are if you fail to pay.
3. Prepayment - There is often a penalty if you prepay small business loans. I've seen some ridiculously punitive repayment terms. Pay attention.
4. Interest calculations and triggers - there are many loans that have triggers that are easy to trip that raise your interest dramatically. Think about it, if you trigger a high interest rate and are stuck with # 3 above...that's a bad combination.

The best advise is to seek small business loans or lines of credit before you need the money. This way you'll be in a better position to shop around and negotiated reasonable terms from your lender.

If you've had a good experience with small business loans let me know who the lender is so we can help other small business owners.