• Sun, Mar 21, 2021
  • Six Items to Look at Prior to Buying a Business
  • Buying
  • If you are looking to buy a business, here are six items you should review prior to buying the business:

    1. Financials

    One of the first things you will want to look at when buying a business is the business’s financial records.  This would include looking at a minimum of three year's business tax returns, financial statements, general ledger, and bank statements to verify business performance and to ensure the business has delivered enough cash flow to pay yourself a fair salary if you are operating the business, have sufficient debt coverage in the event you are purchasing the business with a bank loan or other financing, and return an adequate return on investment for the risk inherent in purchasing and operating a business.   

    2. Operations

    Another thing to look at when buying a business is what processes, methods, and tools are in place.  Every business sale involves transition.  Understanding the processes, methods, and tools that are in place to ensure the business operates as successfully in the future under your ownership as it has in the past is critical for ensuring things do not change significantly after the sale. 

    3. Employees

    After the sale, you will be left with a pool of employees who have operated the business.  It is important to understand if there are key employees who are essential to the business's success.  You will need assurance key employees will stay on after the business has transitioned to your ownership.  If the business requires vocational licenses, e.g., electrical contractor, plumber, etc., and the seller and you do not hold a license, a key employee could be the license holder.  A license holder will likely need an employment agreement in advance of the sale to ensure continued operations.  Other employees may or may not know about the potential sale of the business.  Assessing their willingness to stay is a bit more difficult, but the present owner should have a good feel of who is likely to stay and who might leave.

    4. Assets

    Obtain a clear understanding of what physical and intangible assets you are purchasing.  Tangible assets include real estate, equipment, furniture, leasehold improvements, inventory, supplies, etc.  Intangible assets include customer lists, phone numbers, URLs, websites, emails, social media accounts, intellectual property, etc.  Inspecting tangible assets to ensure they are in proper working order and understanding if any repairs or maintenance is required is something every buyer should do prior to completing a transaction.  You will also want to ensure all assets come to you free and clear of any liens.  An attorney will be able to conduct a lien search to ensure none of the assets come to you with a lender's ability to repossess the asset.

    5. Ownership

    You will want to know exactly who owns the business and speak to each owner to make sure all owners have agreed to sell.  Each owner may have a bit different take on the business's strengths, weaknesses, opportunities, and threats.  Understanding all of the business's strengths, weaknesses, opportunities, and threats will help you greatly in planning for your transition and business planning after the sale.

    6. History

    You will want to make sure there are not any current or pending lawsuits from customers, employees, suppliers, or anyone who may have a claim.  You should also be aware if the business has any tax debts.  You should request the seller provide a Sales Tax Clearance Letter from the state or states of operation.  You should also have an attorney check for any tax liens on the business assets; again, to ensure they come to you free and clear of any liens.

    Of course, every business is different and each business will have unique items that require a deep review.  Always seek advice from your accountant, attorney, and industry specialist before you buy a business.

    Feel free to contact me with any questions about buying a business.

    Eric J. Gall
    [email protected]