Buying a business can be tricky; here's a few ways to avoid trouble.

Here's a tale of two trucking companies that sheds some light on how to navigate the tricky waters of a sale.

Green's Tracking, a regional freight company, has approached White's Trucking, a local freighter, to try to acquire its business.

Although Green's initial inquiries were tentative, White's Trucking has been very receptive, even hinting that it will accept any reasonable offer that Green's Trucking makes.

But Green's owners are dubious. Should they jump at the chance to acquire White's Trucking quickly and cheaply, or are there other issues to consider? A warning signal is flashing in the heads of Green's owners: Why are White's owners so anxious to sell?

Maybe they are simply tired of the business and want out. On the other hand, they may have a hidden agenda that won't become apparent until the ink has dried on the acquisition agreement. But Green's owners don't have to go into an acquisition blindly. They can request a valuation of White's Trucking.

They can also structure negotiations and payments to guard against any unwelcome surprises once the acquisition is completed.

* Valuing the prospect

What purchase price should Green's Trucking bid for the ownership of White's Trucking? A professional valuation of the business can help establish that price.

In addition to assets, Green's accountant can scrutinize White's income statements and balance sheets over the past several years and its budgets and forecasts for the coming years.

Using financial ratios, the accountant can then determine trends in such areas as gross profit, operating profit, return on assets and equity, and interest coverage.

Another important aspect of a valuation with the intention to buy or sell is projected cash flow and its underlying assumptions, especially if Green's Trucking plans to use bank financing in the capital structure. Before the valuation is complete, Green's accountant can conduct a due diligence investigation to search out any problems still concealed.

* Beginning the negotiations

During initial negotiations, the buyer and seller, each with a different timetable and goal, must find common ground. In the case of the two freight companies, Green's Tracking may want to base its agreement to purchase on the outcome of a due diligence investigation or the ability to obtain financing.

For its part, White's Trucking will try to limit the time and scope of such contingencies. Once the companies reach an equitable agreement, they should prepare a letter of intent.

In a letter of intent, the buyer and seller set out the basic terms of an acquisition.

Although the terms are non-binding, they will establish price, payment methods, what assets or stock will be acquired and closing dates, and state that a binding agreement will be signed later in the acquisition process.

* Plan for any hidden risk

The more risk a buyer takes on, the more important a contingency fund becomes during negotiations.

If the buyer decides to rely on the seller's warranties and representations, the due diligence process will be less thorough and the acquisition riskier.

The thoroughness of due diligence and the level of risk may also depend on whether the seller is willing to accept any post-closing liabilities.

During the negotiations, the buyer and seller must decide what provision will be made to indemnify the buyer if the seller's representations prove to be false.

For example, if White's Trucking says that it owns the property sitting under its main distribution facility when in reality it leases the property, under an indemnification agreement, Green's Trucking will be entitled to damages.

* Will that be cash or credit?

After receiving the "all clear" signal from its accountant and successfully completing a letter of intent, Green's Trucking faces another major question: Is it better to pay for White's Trucking in cash, notes, or Green's stock?

If cash payments are part of the deal, another question arises: Will payment be in one lump sum or made over time?

If made over time, what security will Green's Trucking offer for payment? The parties to an acquisition may choose installment payments if the final purchase price is tied to future earnings or subject to adjustment if representations are inaccurate.

From the seller's point of view, the benefits of installment payments are twofold: It will receive earned interest on the payments, and the taxable portion of the payment price will likely be spread out over time.

However, there are some pitfalls, especially if payments are secured by business assets.

For the seller, it might be a good idea to request financial statements and tax returns during the payoff period.

During negotiations, the seller may also wish to take steps to ensure that the buyer does not take funds out of the company for personal needs by forbidding any personal loans from the company and negotiating limitations on salaries while payments are due.

* Proceed with caution

How our tale about White's Trucking and Green's Trucking ends really depends on them.

To make its acquisition a success, Green's Trucking must investigate White's Trucking thoroughly and depend on its accountant to assess the future viability of the targeted company.

Green's Trucking must also structure the agreement to deal with all potential problems once the acquisition is complete.

Finally, both companies should try to construct the acquisition to achieve the greatest accounting and tax benefits possible for both.

Harvey A. Goldstein is author of "Up Your Cash Flow" and the managing partner of Singer Lewak Greenbaum & Goldstein, an accountancy based in Westwood.

Small Business is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact Dan Rabinovitch at [phone] with feedback and topic suggestions.