In today’s economic climate, a number of experienced and highly educated professionals are facing an unplanned career change. Many see this as an opportunity to pursue the dream of entrepreneurship by purchasing a small business. If you are one of these, make sure you do your homework. While you personally need to determine what type of business you will buy, and whether you have the necessary skills and passion to make it succeed, you’ll also need to consider the less exciting technical issues. Here’s your assignment:
1. Get real financials. The number one thing you should do before buying a business is verify its financial performance. Don’t rely on the seller alone for this. While you can start with seller-prepared numbers, don’t stop there. Request tax returns and financials prepared by a third party accountant. Then have it all reviewed by an accountant you know and trust.
2. Make sure the business can be sold free and clear of liens and claims. Many businesses finance operations, inventory or real estate, resulting in security interests encumbering the assets. Make sure you have all of the necessary searches conducted, e.g., liens and mortgages. Sometimes a small business has been in litigation and is subject to a judgment, so you should conduct a litigation search as well. If it turns out your seller owes a bank or other creditor, make sure they’re paid before you take title to any part of the business, lest you end up buying a liability.
3. Only buy what you want. You should only buy assets such as inventory, real property, equipment, customer lists, intellectual property and receivables, and avoid liabilities. Depending on the transaction, assuming some liabilities may be unavoidable. For example, if the business is operated on leased premises, you’ll have to assume a lease. If there are existing employees, you’ll need to decide whether to retain them. There are significant legal issues associated with retaining existing employees, so make sure to consult a human resources professional and legal counsel.
4. Confirm government approval. Even in our free market economy, all businesses are regulated to some degree. Make sure the one you are buying is in compliance with all applicable local, state and federal laws and regulations. This includes zoning laws, building codes, tax laws, occupational licenses and other relevant regulations.
5. Have a plan. Even if you’re buying a business with a history of success and an excellent business model, you must make your own plan. The most important part of the plan is your budget. Preparing a budget, in part based on your financial due diligence, will give you more realistic financial expectations and help control expenses. Perhaps most notably, a written plan, budget and pro forma financial statements will help you persuade a lender to extend you credit.
This is just a brief summary of the due diligence items you will need to complete before buying a business. Doing your homework first will greatly increase the likelihood of your success in your new business venture.« Back to news