Buying a business can give a person a head start over starting a new business.  It provides an established market, trained employees, proven profit potential, and on and on.  But, are there any "hidden liabilities?"

Obtaining sound professional assistance, from an accountant, an attorney, and even a local Small Business Development Center (SBDC), can be helpful in identifying pitfalls to be avoided when buying a business.  Remember, professional help will not necessarily make a purchase free of obstacles.  If you know what to look for, and how to protect yourself, an educated buyer can save time and money.

Many experts will advise the purchaser to require a statement from the seller stating that all taxes have been paid and that the buyer assumes no liability for any unpaid taxes.  As the purchaser of even a portion of a business, you may be held responsible for the previous owner's liabilities, regardless of any contractual language to the contrary.  You should also make sure that the seller of the business provides proof that there are no hidden liabilities.  The seller of the business should contact the Michigan Department of Treasury at (517) 636-5260 to obtain a form to request a Tax Clearance letter or access the information online .  The Department of Treasury will only provide the Tax Clearance Letter to the existing business owner.  As the buyer, you may not request the letter yourself.  However, it is wise to obtain a copy of this Tax Clearance letter from the seller prior to the closing date or signing any purchase agreements.  If you are in a hurry to purchase the business, request that the seller obtain the Tax Clearance Letter and escrow sufficient monies to cover any potential tax liability until the letter is received.

Does the business have employees?  Has the business had employees (payroll) at any time over the last two years?  If there are or were employees, the purchaser may soon encounter, "successorship."  What does this mean to an entrepreneur?  MONEY…potentially, a lot of money over the next FIVE YEARS.  New employers (those who do not buy an existing business) pay an unemployment tax rate in their first two years of liability of 2.7 percent of the first $9,000 of every employee's wages in a year-except for a new construction employer, which may be higher.  A successor employer (one who buys an existing business), however, "inherits" the account of the predecessor (or former owners).  If benefits have been paid over the last five years, or if the account has a "negative balance," chances are the successor will have a rate in excess of 2.7 percent-in fact, as much as 10 percent.  Since the annual rate is based on the benefits charged over the last five years, and the balance in the account, it is possible that the rates will be high for five years.

How can you avoid this?  You can request from the seller a "disclosure of account" and then contact the  Unemployment Insurance Agency  at (800) 638-3994 and ask for the amount of the benefits charged over the past five years and the reserve balance (positive or negative).  The request should be in writing and should be accompanied by some form of commitment to purchase the business (a purchase order contingent on the report from the Unemployment Agency, for example).  Once the purchaser has received the information from the Unemployment Insurance Agency, what do they do?  If the report is bad, should you look for another business? Not necessarily.  The higher costs should be included in the cash flow and profit projections.  If the business still looks like a winner, buy it! But, you may want to offer less since the purchaser will be assuming a long-term liability.

Is successorship always bad? No. In some cases, the purchaser may be able to inherit an unemployment account with a tax rate of .2 percent in 2000 and phasing by 2002 to .1 percent tax rate (instead of starting a new business with a 2.7 percent tax rate).

One more note-any benefits currently being paid, or those resulting from the sale, will be charged to the successor's account.  Find out from the seller if any employees are, or will be, collecting benefits.  If possible, hire these employees!  The purchaser will get employees who already know the job and will save money.  For further assistance, call the  Unemployment Insurance Agency  at (800) 638-3994 or a local Small Business Development Center.  Both of these agencies have information and advice that can be very valuable in buying a business.