Although an attorney will prepare the closing documents for closing, it is important to be prepared and understand what to expect. This article is a guide for you when considering what expenses will be divided, which are called standard prorations. When buying an ongoing business, a big advantage is that everything transfers to you at the closing; and the business continues to operate immediately. Because some continuing expenses must be prorated, the division will be included in the closing papers.
If the business you purchase does work for others, the work in progress is a consideration. It is highly unlikely that all jobs will be completed before closing, and it is important to have future jobs lined up. When inventory is ordered for a specific job to be completed and billed after closing, the seller wants to be reimbursed for his/her inventory expenses attributed to that job. Also, when labor is allocated to a specific job to be completed and billed after closing, the seller wants to be reimbursed for his/her labor expenses attributed to that job.
There are other employee benefits to consider. Accrued vacation time should be discussed. Sometimes the buyer will agree to honor accrued vacation time for employees as a sign of good faith; otherwise, the seller will pay employees for accrued vacation at the time of closing. Health insurance offered to employees should also be prorated if it is already offered to employees. If there are temporary employees, it may be necessary to divide their cost if their employment lingered after closing.
Some advertising expenses will likely need to be divided if they are ongoing. Some printed ads are paid annually or monthly, and internet ads are usually paid monthly.
You will want to look at the seller’s insurance and then do some comparisons. It is usual for the seller to cancel his/her insurance effective the date of closing and your insurance to begin that date. However, insurance premiums proration may be necessary if you are retaining the seller’s insurance.
Some utilities may be assigned to the location. If they are, they will need to be prorated at closing. However, most utilities will be stopped by the seller and started by the buyer the day of closing. You will have everything changed to your name and make any deposits necessary.
A tax clearance form must be filed after closing, which will declare the closing date. The seller will be responsible for all taxes through that date, leaving no responsibility for you to pay them; and you will be responsible for all taxes from the date of closing.
The list of assets included in the sale of the business will be included in the closing documents, and they will be owned by you, the buyer. In addition, sometimes contracts will be in place for equipment and maintenance that is leased or on a payment plan. You will take over the payments for these items, and a proration may be needed to balance what has been paid and what is owed. Just to give you an idea of possibilities that might have contracts are the following: telephone system, office equipment, security system, computers, and ice machines or coffeemakers if the business is a restaurant.
Leasing the location of the business could require a proration, depending on how it is handled. You must be approved by the landlord, who will either write a new lease or a valid lease assignment where the seller agrees to remain on the lease throughout the current term if required by the landlord. You could also get a valid sublease of the existing lease. Both the rent and common area maintenance charges are normally prepaid a month in advance.
Closing on the first day of the month will likely reduce the number of prorations needed, as many of the items mentioned in this article are paid the first day of each month. The closing attorney will prepare the closing documents and will include prorations for any needed items to which the seller and you have agreed. Your business broker will also be available to assist you with many of the important decisions. Of course, it is important for you to have an accountant and attorney to guide you in your purchase and also work with you throughout the years in which you own your business.
