5-Step Guide to Buying an LLC

Advantages to purchasing an existing business include:

• Credit history. The business may have a better credit history than your personal history. It takes time to build a good credit history, so this can be a quick way to get better credit terms with vendors.
• Vendor relationships. Speaking of vendors, you’ll inherit the business’s vendor relationships rather than building them from scratch.
• Branding. Buying a business with an established brand can save you the hassle of creating, designing, trademarking and marketing a brand.
• Customer base. If you purchase an LLC that’s growing or enjoying consistent business, it’s likely you’ll inherit a loyal customer base. Keep that in mind when making your own changes to the newly purchased business.
• Established business practices. Why change what isn’t broken? You can adopt the business practices of the LLC you’re purchasing without having to reinvent the wheel.
• Market knowledge. If the existing business is successful, you know it’s in the right market. That lets you avoid research necessary for business owners just starting out.

Disadvantages to purchasing an existing LLC include:

• Paperwork. You won’t avoid the pain of formation paperwork entirely — a change in LLC ownership often requires updating state formation forms, IRS documents and internal business agreements.
• Due diligence. Investigating a business’s finances can take a lot of work. If you hire an attorney or accountant to help, this phase can get expensive. However, it’s still necessary to uncover major problems before the purchase is complete.
• Ownership changes. LLCs don’t respond to ownership changes as well as corporations. There may be certain conditions in the operating agreement you need to meet. Additionally, you can’t guarantee employees of the business will want to work for a new owner.
• Bulk payment. Purchasing an entire business may require more money up front than starting an LLC on your own. Starting from scratch may allow you to pay for assets as you acquire them, rather than all at once.

An LLC purchase is a major decision, but depending on the nature of the business, may be simpler than starting an LLC from scratch. Naturally, the bigger an existing business is, the more complex — and potentially expensive — the buying process will be. The specific steps you take may look different depending on whether you’re purchasing a simple online store or a massive real estate investment company, but these are the steps you can expect.

Step 1: Find a Business to Buy

This may seem obvious, but how do you find a good business to buy? Chat with local entrepreneurs to determine the best way to network. Some starting points could include:

• Local chambers of commerce
• Trade publications
• Trade associations
• Business journals
• Ask around

Step 2: Establish Purchase Framework

Before going through with the purchase, establish a rough framework, including:

• the purchase price you’re both willing to settle on
• structure of the deal (the whole business, only assets, etc.)
• pre-approval paperwork from a lender (if applicable)
• how long you have to complete the purchase process
• whether you need to sign a confidentiality agreement

You can memorialize this information in a “term sheet” or memorandum of understanding (MOU). Still, these terms are subject to change as you look closer at the health of the business in the next step.

Step 3: Complete Due Diligence

The due diligence period is necessary to avoid disaster in taking on an unhealthy business. At this point, the existing business owner should give you access to any documents you need to determine the health of the business, including (but not limited to):

• Tax returns
• Financial statements and analyses
• Bank accounts
• Business licenses and permits
• Legal documents/proceedings involving the business
• Current contracts or leases
• Credit terms with customers or vendors
• Human resources documents

If you’re unsure of what to look for, find a complete checklist of due diligence items for the type of business you’re buying.

Step 4: Finalize Your Purchase Agreement

If you’re satisfied with the results of the due diligence phase, it’s time to finalize your purchase agreement. Most people have an attorney draft this or, at the very least, have an attorney look over the final draft. A company like LegalZoom can provide a template and then connect you with an attorney to review the final.

One size doesn’t fit all with purchase agreements. If you’re only buying one LLC member’s share in an LLC, you’ll want to find a membership-interest purchase agreement. If you’re buying an LLC’s assets only, you’ll need an asset purchase agreement. Finally, if you’re buying an entire business, you’ll draft a general business purchase agreement. Consult with a professional to determine what type of agreement you need and how best to approach the drafting process.

Step 5: Close on the Purchase

The final step is to close on your purchase. To do this, it’s helpful to have a closing checklist to make sure you have everything you need to take the reins of your new LLC. You’ll likely need to update filings with the state, IRS and financial institutions. You may need access to business websites, vendor accounts and social media profiles. Make sure everything is handed over before you sign on the dotted line.

Buying an LLC isn’t the best decision for everyone. If you’re considering creating an LLC from scratch instead, check out our comparison of our top picks for LLC formation companies below.

Legal Disclaimer: This article contains general legal information but does not constitute professional legal advice for your particular situation and should not be interpreted as creating an attorney-client relationship. If you have legal questions, you should seek the advice of an attorney licensed in your jurisdiction.