Whenever you are buying or selling a company, the best strategy is to do your homework. That way, the outcome might be win-win.

Sometimes, buying an established company is less risky than trying to build a business from scratch. A recognized company brings with it an existing customer base, a reputation and vital employees. This has advantages for both buyer and seller. In addition, there are key strategies for each party when it comes to engaging in a sales transaction. From the seller's perspective, the owner can take key steps to maximize value and prepare the business for a profitable sale.

From the buyer's perspective, it is important to conduct due diligence, avoid making common mistakes and find ways to structure the best deal possible. In both situations, looking at all the options is important to create a win-win outcome for both buyers and sellers. There are two types of deals to consider when purchasing: a purchase of the assets of the business or a purchase of the stock of the company, assuming it's a corporation. There are benefits and pitfalls to either.

When buying the assets of a business, there are some tax advantages in that a buyer does not have to assume the liabilities of the business. On the other hand, purchasing the company's stock means inheriting outstanding tax liabilities, undisclosed debts, overstated earnings, poor employee relations, overvalued inventory and pending lawsuits. At first glance, it might seem more attractive to buy assets only; however, certain contracts are not assignable when purchasing only the assets.

Engaging in due diligence can determine whether the company's contracts are assignable and whether they will continue after the stock or asset purchase. Another benefit from purchasing the stock is the tax-favored capital gains treatment received with this type of purchase. In general, sellers prefer to sell stock, buyers prefer to purchase assets.

Common Buying Mistakes
Buying a business is a complex process, confounded by the interplay of business, legal and people issues. Although it can be a rewarding process if it is the right business and has been researched thoroughly, buyers often make one or more of the following mistakes:

· Buying the wrong business - Whether the buyer plans to be hands-on or hire managers to do the bulk of the work, most entrepreneurs require a business that suits their skills, knowledge, interests and personality. Otherwise, the business may not be successful.

· Signing contracts or agreements in his or her own name - Contracts, loan agreements and leases should not be in the buyer's name. Instead, set up a corporation or LLC to purchase the business to avoid subjecting personal assets to the risks of the business.

· Not conducting proper due diligence - Just because a business appears to be successful and even shows a profit doesn't mean that it is problem-free. Find out exactly what is owned, borrowed, leased and owed to avoid being saddled with a pile of bills, unpaid vendors, overdue rent and other outstanding debt.

· Not knowing why the business is being sold - A business owner may simply say he or she is retiring. However, this owner may know that a competitive business has purchased the property across the street. Determine why the business is up for sale and what the business environment will be like once the transaction is completed.

· Ignoring the company image - Most businesses have established an image or a brand through the years. Customers are familiar with this, making the image integral to the value of the business. Chang- ing it quickly can be self-defeating.

· Not having a favorable purchase contract - Details such as physical concerns about the property, assets and intellectual property such as trademarks, stock and outstanding bills regarding the acquisition should be negotiated. In the sales contract, define who is responsible in each area and exactly when and how the responsibility shifts from the seller to the buyer.

· Overextending financially - A common mistake is to go into serious debt when buying a business. It might be prudent to wait until there are sufficient funds without accumulating such debt or, alternatively, put together a buying team to purchase the business.

· Making drastic internal changes - One frequent occurrence is changing the staff when the new ownership takes over. The time in which it takes to train a new staff can cost money while setting the business back a little. Often the current employees are the most familiar with the internal workings of the company.

· Not promoting the business - Do not assume the business will simply promote itself because it is already established. Even if the business has a solid base of steady customers, immediately establish a comprehensive advertising and marketing plan.

· Not knowing the value of the business - Buyers must do a detailed financial analysis of the business to determine the appropriate price to pay. This includes reviewing income and loss statements, balance sheets, key assets, contingent and actual liabilities and cash-flow statements. In some cases, buyers may discover that it is more cost-effective to start from the ground floor with a brand-new business.

Moving Out: Selling a Business
The first step in selling a business is to determine an asking price. There are multiple formulas and tools that can help owners set price, but there are no absolutes. One way to determine value is to find out the selling prices of similar businesses in the owner's area.

Secondly, sellers can contact their national trade associations to see whether any statistics exist. In addition, sellers can employ the services of a professional business appraiser who will provide valuation services to lend more credibility to the initial asking price and to keep the reins on sale-price negotiations.

One Foot Out, One Foot In
Sometimes an owner needs to reduce his or her role in the company without completely leaving the business. Going public can be a good alternative to selling the company. This entails offering company stock to the public on an open market to raise large sums of capital that previously were out of reach for the company. Because each industry has different criteria for IPO success, it is important to research the IPOs of similarly-sized companies. Serious contenders should have a three-year track record that is characterized by accelerated growth.

Be aware, however, that an IPO means a significant loss of control for an owner. The owner will be accountable to outside investors, most of whom are in it for the money and do not share the owner's passion for the company. Finally, the cost of going public can be steep, so it's definitely not the answer for a company that is looking for alternatives to bankruptcy.

Succession Strategies
Often, privately held companies neglect to make succession-management plans. This puts the company at risk. Failure to prepare the firm's next generation of leadership may stem from a lack of capable managers or a lack of interested family members.

Outsiders generally view the absence of a succession strategy as a company weakness. Failure to implement succession plans can shatter a potential IPO, discourage a management buyout and repel underwriters or institutional investors. To ensure a smooth transition, it is crucial for owners to establish succession strategies several years in advance. Family members and key employees are two good starting points when looking for potential successors.

Buyers and Sellers in Sync
Buying or selling a business may be the largest and most important deal of an entrepreneur's career. This is a high-stakes transaction that will have far-reaching financial and emotional consequences for both parties. The steps that an owner takes to prepare the business for a sale are the same ones a seller should research when purchasing a company. A seller should create audited financial statements and projects to illustrate the company's revenue and growth potential; a buyer should request and review these.

Stewart Cloer is senior tax strategist and senior manager of the transactions group at IPA Advisory & Intermediary Services LLC (IPA). For more information, call 847-495-6786 or visit www.ipa-iba.com.