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steve from youtube asks how do things get handed over when a business is sold i'm david c barnett and you're tuned in to small business and deal making the broadcast podcast youtube channel where i talk about buying selling financing and managing small and medium-sized businesses while controlling risk so if you're looking to take control of your future through buying a business one day or if you already own a business and you're looking to grow or exit you've come to the right place i talk about interesting things i talk to interesting people and i answer your questions every week right here so be sure to hit like be sure to hit subscribe and let's get to it what a great question steve so let me tell you there's there's two ways that a business can change hands i've talked about this in some of my videos before one is through a share sale or an entity sale where the corporation or the llc or the you know whatever it is depending on the place in the world that you are is is changes owners so that entity might have bank accounts it's got supplier relationships etc and basically nothing changes the ownership of the entity has changed the directors of that entity are changed and so you might have to go down the bank and sign some papers and whatnot to put you in charge of the bank account right so in a in a share transaction things carry on pretty smoothly and that's why bigger businesses are often sold in this way especially businesses that have a lot of contractual relationships etc so that's easy now let's get to asset sales so in the case of an asset sale you have a seller who may have an entity corporation llc something like that and they are selling the assets of that business to you as a buyer and maybe you have set up your own corporation or what have you to make the purchase so what's happening now is the business as a going concern is moving from one legal person to another and so that means that all of the relationships contracts etc that the selling party entered into they don't necessarily automatically transfer to the new person legal entity that is buying the business so one of the things you put in your comment was like the name for example well depending on your jurisdiction there is usually a way to transfer a name and operating name from one entity to another sometimes a corporation actually has that name on it for example and usually there's a way to de-list or de-register that name and at the same time the buyer entity will register that name and you know the reason why we register names with the government is so other people can't use them well if i deregister a name and then you register it at the same time often we do this together um and then i can give you permission to basically register the name that i used to have and so that's you know permission basically is the thing that supersedes all these rules about infringing on names this is why every mcdonald's franchisee is allowed to accept a check written out to mcdonald's for example because they are have been given permission by mcdonald's to be using that name to do business right so there is a way legally to transfer the name from one entity to another now what about all of the customer and supplier relationships right so this is going to vary depending on the type of business that you're in if you are in the lawn mowing business for example and you know the seller of the business showed up every monday to mow mrs smith's lawn and she writes a check to pay them then when you show up on the first week that you own the business to mow her launch she's probably just going to write you a check right doesn't really matter and so in cash retail walk-up businesses the customers aren't really going to you know care a lot of the times however if you have contracts with your customers if they have certain requirements of you so let's say that you're selling to a bigger company and they want to have on file documentation of your insurance for example right when the business is sold all of those customers are going to have to be notified and those contracts are either going to have to be assigned but they sometimes might contain language in them that prevent them from being assigned which this is one of the reasons why when you get big enough people favor the share sale so that you don't have to do this but you might have to go and talk with each of those customers and they may have to resign with the new entity so that's a consideration when people are looking at buying a business the bigger consideration though is on the other side of the table suppliers and vendors so if you have something like a credit card terminal right and let and these things are often leased on a contract with a monthly payment in my experience if you call them up the buyer and seller call them up together and say i'm selling the business this new person is going to take over the lease like all those people care about is getting their monthly payment so the buyer has their own bank account you call up the credit card terminal company the buyer will have to create a new account with them they'll have to say the money's going to be deposited over here into this place and i've had instances before where people have bought the business it's taken three or four days for the terminal to you know be switched over to their own bank account and so for those three or four days the money that customers are spending goes into the seller's account and they just transfer it over they just write them a check just give that money over to the buyer and help in this facilitation of the transition this is why when we sell when we buy a business we ask the seller for a training and transition period because there has to be this cooperation sometimes in helping with the transition helping make all these things happen now when you're buying a business one of the things that you have to consider is the operating capital question and so we look at balance sheets and we see how much inventory there is how much there is in the way of receivables for example and how much there is in the way of payables a lot and that this helps us determine how much money we're going to need when we operate the business in many asset sales to keep things simple what will happen is the seller will retain the receivables and the payables meaning that they will collect the money from the jobs or the invoices they created and they will pay off all the bills that existed from before you took over the business if you calculated the amount of operating capital you need based on what they were doing then there could be a problem when you start to do business with their suppliers if those suppliers won't give you the same trade terms what i mean well that seller might be getting 30 days to pay one of the suppliers but when you call up the supplier and say the business has been sold they may not extend 30-day terms to you this is one of the things that needs to be considered when you're buying a business is what if i don't get the same trade credit terms that the seller has obtained because they have a long history with that supplier in my experience a couple of different things happen sometimes when you contact the supplier the person you deal with really has no idea about buying and selling businesses really doesn't know you know about how legal entities have changed and all that kind of thing and you might end up speaking to a clerk who simply says oh we need to change the name on the account okay and they just like maybe they'll have to change the legal entity name on the account and they may continue to give you the same terms the other person had because they don't make any change if you talk to somebody who is a little more informed and maybe they're concerned that you won't run the business as well as the past owner they might say you know well we won't we're going to put you on cod terms until we have a history with you or we're only going to sell to you on a credit card so this is one of the reasons why when you're doing due diligence on a business and you're seeing who are the suppliers you want to have an idea of what the credit terms are are that are being offered to that business and you need to have an idea what you're going to do if you can't get the same credit terms so in some industries there's a lot of competition right if if there are a lot of wholesalers selling the same goods your response might be to call up a competitor and move your business someplace else if it's a competitive wholesale environment that means that more often than not this the supplier is going to give you the same kind of terms because they want to keep the account if it's more of a you know less competitive industry where the the wholesaler has more trade power then they might say look for the first couple of months we want to have your credit card on file or we're going to limit the amount of credit we're going to give you or one of these things so those are the things that you have to consider is what are the inflows and outflows of money that are going in and out of the business where do we have to sign new agreements where do we not in a lot of cases people will just sort of carry on doing what the previous business owner was doing and then when contracts come up for expiry they'll get them renewed under new contracts with the new entities name and and again it varies depending on the type of industry and business that you're in um so the other thing too is like employees okay so when you're doing the handover and it's an asset sale technically what has to happen is all the employees of the business are given a notice that their employment is being terminated with the entity that used to own the business and then as a buyer you make an offer of employment to those people typically under exactly the same terms and conditions that the previous person was was using to employ them very rarely have i ever seen employees say oh my goodness the business is being sold i have a new boss i'm just going to quit that hardly ever happens the employees need their paycheck they have bills that they're they need to pay and more often than not it's all in the presentation so when the business is sold the buyer and seller meet with the employees and say hey good news there's a new owner who's got ambitious plans to grow the business and don't worry your jobs are safe and then here's some paperwork you need to take home and one of the things is saying your employment's terminated with this company and now it's you have a new job with this other company it means that when it comes around to tax time that employee is going to get two different tax slips one showing what they earned with the previous owner and what show and the other one showing you know their earnings with the new company kind of thing so you basically look at every department or every aspect of the business and you consider what has to be changed here what has to move and a lot of the times you get into this when you're doing your due diligence period so you've come to an agreement on what the price and terms of the business are going to be then you do your investigation to figure out if there's any problems with the information that's been presented and while you're doing that and you're looking at all these different you know big customers or big suppliers etc this is when you start to consider what do we need to do in this case as far as the handover and the sellers are a key you know part of this process again that's why they call it training and transition because you know my recommendation is that all of these important stakeholders outside of the business be approached by both the buyer and the seller together in order to facilitate the transition i hope that helps steve it's it's a great question and i'm surprised no one else has asked it before if you're thinking about buying a business of course you should head over to businessbuyeradvantage.com it's where you can learn more about how i can help you buy a business and where you can sign up for my online course which is called business buyer advantage and with that we'll say see you later we'll talk to you next time so how can you learn more about buying selling financing and managing small and medium-sized businesses easy head over to my blog site davidcbarnett.com where you can learn more about me learn how i work with my clients you can learn about my books courses that i've prepared for you you can also find out all about how to subscribe to my email list the youtube playlists etc there's literally hundreds of hours of content there all for free and i'd love for you to be my guest