Dear Small Business Adviser:
I'm buying an S corporation optometric practice. I had worked with the prior owner, who died, for seven months. Should I buy the shares of corporation, or should I have the corporation dissolve then set up my own corporation? Also, how do I go about getting loan at a good rate? Since I haven't been in practice for two years yet, most lenders don't want to accept me. Is there any loan company that would understand my situation?
There is no specific answer for your question. Each business must be evaluated, and the operation's merits or any liabilities you discover then will help you determine which is the appropriate course.
The corporation has a set of documents drafted when the corporate status was formed. There may or may not be additional documents associated with that corporation that may impact whether you opt to buy all existing shares of the corporation or dissolve it and start anew. Regardless, you need to establish a step-by-step process in deciding how to purchase the existing business.
First, assuming the deceased optometrist's next of kin approve, access and examine all existing corporate documents, from the simplest (fictitious name registration) to most complex (articles of incorporation). Hire a lawyer who specializes in the incorporation process to examine all these documents. A simple review of the Corporate Creations FAQ page will give you a brief understanding of the issues associated with legal business structures and those matters to which you need to pay attention when reviewing the corporate documents. This also will help you to prepare for the visit with your lawyer.
Secondly, access and review annual financial statements for the last three years of the practice and the last six consecutive months. These statements include balance sheets, income and cash flow statements. If you have little or no understanding of financial statements, seek the services of a trusted bookkeeper or accountant who can lead you through the process. You'll also need these documents when you apply for a loan, as the lender will expect to view all of these documents, too.
Third, get a list of all accounts payable and receivable. The bookkeeper or accountant will also need to assess the days payable and days receivable on those accounts. In short, this means the average amount of time, in days, that it takes to collect accounts due to the corporation and the average number of days it takes to pay the bills. Again, the bank will want to see this information.
Fourth, secure a list of all fixed assets owned by the corporation, including original purchase price, purchase date, method of depreciation and accumulated depreciation to date. And yes, the bank needs to see this, too.
Loan prep basics
As for your efforts to secure financing for the purchase of the company, there are other factors that come into play than simply how long (or short) a time you have been practicing. For example, the key considerations for a lender are what is the asking price, is it a legitimate price and how much of the total purchase price can you provide from your own resources?
What kind of personal credit rating do you have? An excellent credit rating will certainly place you in good favor with lenders. The last year has resulted in a lot of bad debt, secured and unsecured. Bankruptcies are definitely on the rise and an excellent credit rating in these times are most favorable.
Furthermore, do you demonstrate the ability to operate your own business? If you do not have the expertise to handle financial and administrative duties, be certain there are staff members and professionals who can meet your business's needs in these areas. Insurance agents, lawyers and accountants can provide outside services. In-house you need to have a good staff to collect outstanding receivables, pay the bills and professionally attend to your patients while they wait on you.
In short, get professional advice, prepare the loan application documents and then sit down and talk with the commercial lender. And don't be content with one lender. Visit several to see which are truly interested in you, interested in making the loan and interested in keeping you as a customer, personally and professionally.
I wish you well.
Article courtesy of YellowBrix, Inc.