Entrepreneurs must perform their due diligence before buying an existing business. Be sure to think your way through everything you need to understand before making this commitment.
Why is the business for sale? You must get an answer that you feel is credible. You have the right to be skeptical; do not think you have to accept the first answer you hear.
What is your general perception of the industry? Your intent will be to increase the volume of the business. Has anything happened to have an adverse affect on the demand for your business or service? Think beyond the history and think of the future in the company. Can this business grow?
Is this company one of the better ones in the industry? When you purchase an existing business, you inherit the business, the customers and the reputation; you become what is seen through the eyes of the consumer.
What is the long term outlook for the industry that you are going into? Are they soon to peak and then fall? Where is this industry, in the market trend; are they on the rise or is the demand declining?
Consider competition; what are your competitors doing? Is the level of competition in this field or industry increasing or decreasing in your target market area?
More Due Diligence Work before Making the Final Decision:
Interview some of the customers. Ask for their customer list so you can randomly choose customers from their list, rather than allowing them to give you ones that are likely to say only positive things. You might be required to sign a non-solicitation agreement promising that you will not solicit their customers for your business if you choose not to buy their business.
Are they a member of the Better Business Bureau? If not, chances are there is a reason they don’t want to be. This could well be a big red flag. The Better Business Bureau will provide reports of complaints made against the business. Most businesses will get some complaints; look at how the complaint was handled and if the problem was resolved.
Check with trade associations to see if they have heard anything about the company you’re buying. Find out what they know about the company’s reputation. Chances are, they will only know something if the company is very good or very bad.
Research your Competition
This research takes time and energy, but what you learn will be powerful. Find competitors who have failed and find out why they failed. This information will help you to avoid making the same mistakes. Find some who have been successful and find out why, to get some great tips on being successful yourself.
Gather financial information; ask for financial statements, Cash flow Reports, P & L Statements, Balance Sheets, etc…Consult a CPA or expert on analyzing financial data if you are not skilled in accounting. Their opinion as to the financial condition of the company you are considering buying is important to you.
Ask to see their recent tax returns. If they try to tell you they are making more than they are reporting, they are not saying a lot about their character. If they say they’re dishonest with the IRS, who’s to say they’re being honest with their customers and with you? Remember, you are buying the business based on official financial reports, not the extra benefits or income stated by the owner.
Understand whether or not there is excessive inventory; this looks like an asset, but could be a liability because now you have inventory which you must sell. Is the inventory obsolete?
What do you believe is the lowest level of inventory you can maintain and still run your business? You must have adequate inventory to meet customer demand, but not so much that you have trouble unloading it. Being able to run on a low level of inventory can be an asset to a business; just-in-time inventory is a business concept where you only have as much as you absolutely need to have on hand at any given time.
Having too much inventory on hand means too much cash is tied up here and the inventory takes up space. Having too little inventory means not being able to fill orders and losing sales.
The Value of Accounts Receivable
Accounts receivable are rarely worth their face value; many are from people who cannot pay; they made the agreement when they were able to meet their obligation, and then things changed. Do not pay 100 cents on the dollar for accounts receivable. The price for the accounts receivable should be discounted according to how long the accounts have been aging.
Your Cash Investment
How much do you need to operate your business? Be careful to be sure you have the money to cover the upcoming overhead, including payroll, accounts payable and all operating expenses for at least the next three months. Expect a revenue dip during the first 90 days of acquiring the business.
Assume their liability insurance in case there is a pre-existing situation that may result in future litigation. A new insurance company is only obligated to cover you from the time you purchased the business. If there was a problem before, for example, someone was hurt before you purchased the business, maintaining the same policy with the same company will ensure that you are covered if they should sue. Do not be too quick to change companies even if you can get cheaper insurance; the additional cost of premium is well worth avoiding the risk.
What else should be Included in the Acquisition?
Be sure you get the websites, phone numbers, logos and trademarks that exist within the company. Otherwise, the former owner keeps the phone number and all your customers continue to call them instead of you!
Don’t be Afraid to Hire a Professional Consultant
Buying a business is a huge investment. There are financial and legal issues understand and analyze. No matter how much research you have done and no matter how much you may think you know there are likely things you are not aware of; things you haven’t considered.
Are there any legal issues to be aware of? Pending Litigation? Has there been an audit recently? This information will be shown in the footnotes on the financial statements. A professional knows what to look for and how to find it.
A good professional advisor, such as an attorney or a CPA will help you avoid missing something critical that should be included in the purchase of the business. They are professionals at gleaning financial data and analyzing legal issues that you may have no idea even exist.
You will make the final decision as to whether or not to buy the business, based on your own research and the opinion of one or more professional business consultants. Your due-diligence is your advance preventative medicine; hiring a consultant will save you a great deal of money while preventing you from making a very costly mistake.
Bill Bartmann offers very detailed due-diligence advice in his online course, Billionaire Business Systems. This course covers financial and legal issues of starting, owning and operating a business. To be successful in business and to avoid the most commonly made mistakes and pitfalls of business ownership, check out Bill Bartmann’s course at http://www.billionaire.com