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Do Your Homework Before You Buy a Business

Acquiring an existing business may be less of a risk, but there are pitfalls

By SCORE | May 22, 2013

Not everyone wants to start a business from scratch.

There is a certain attraction to coming into a business that has a history and has grown over the years. It has a location, a name, the necessary permits, customers and cash flow.

Compared to a start-up there is a lower level of risk and a greater chance of getting financing.

Get professional advice

However, one must do due diligence. You must make sure that there is a history of profitability.

  •       Hire an accountant who specializes in business valuation to analyze the financials to make sure that they are what they say they are.
  •       Hire an attorney who can make sure that there are no legal actions against the business, make sure the sales tax is current. Other risks may include obsolete inventory, uncooperative employees or outdated technology.
  •       Hire a professional to help you determine if the business is priced properly. Are you purchasing the assets? Are you purchasing good will?

10 questions to ask before you buy

Here are ten questions you should consider asking when purchasing a business or a franchise.
  1. Do you have professionals lined up to advise you? Make sure that they specialize in business acquisitions. You will need to find a banker, accountant and attorney. If you do not know people in these professions, get a referral from someone who is currently in business or contact the Bar Association or the Association of CPA's for a referral
  2. Why is the business for sale?
  3. Are you purchasing the assets? Are there receivables?
  4. How much inventory are you purchasing and what is it valued at? Also consider obsolete inventory or inventory that has been purchased more than one year ago that has not been sold.
  5. Is the owner willing to stay on to help with the transition? You may consider working in the business before you buy it to see if in fact you like this business.
  6. Is the business in a leased space? How long is the lease? Can the lease document be transferred with the same terms? Is there any leased equipment? Can the lease contracts be transferred? Are there any warranties that can be transferred?
  7. How much cash does the owner need upfront and will the owner be willing to take back any financing?
  8. What is the best way to finance this purchase? (A banker can advise on all the different bank loans available and an accountant can structure the purchase with the best tax ramifications).
  9. Have you analyzed the paperwork? Before you purchase any business always get the tax returns, balance sheets, income statements and cash flow statements. At this point, you need to have made an offer contingent on the financials with a refundable deposit to show good faith. Now, have your accountant analyze these documents and advise you.
  10. Has the company or its principals been involved in any lawsuits or bankruptcies?

Always do your due diligence when purchasing a business and have professionals advise you and protect you so that if the business is misrepresented in any way you have recourse.

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