Are you Considering Buying A Business!
If you are Thinking About Buying A Business – Read This First!
This is exactly what I would do and ask if I were buying a business:
- Has the seller run into any IRS, State or Government problems?
- What do the current business customers have to say? Unless you know who buys from your prospective business and why they buy from that business – You are only guessing at your customer base when you are buying a business and whether or not there really is one – implied or real.
- What kinds of things they has this business done in the past and at present to market their business and to generate new business prospects. Customers are fickle. A change in business ownership generated in the buying a business phase can often set off a 10% or higher, decrease in total business sales revenue. The rationale is that if customers have to switch, they may as well open the playing field to other people who can help them solve their problems. You have zero customer loyalty when you switch company ownership. When buying a business you just can’t force customers to stay – Even with a contract from the current owner.
- If you cannot get your seller to put their money on the line, it may serve as a warning of the seller’s confidence in the future of the business you are buying from them – Will they finance part of the buying a business versus you financing buying a business 100% out of your own pocket? (They know more about their business than you do. If they’re not willing to let any money at all ride on this business they are selling, should you?)
- How did the current owner determine the valuation of their company? What factors went into the decision to price their business at the price they are asking? If you are buying a business, Don’t ever pay a higher price for sentimentality.
- What is so great about this business that you couldn’t go out and duplicate this business and start brand new – Without buying a business. Is there a client list of 4-10 customers only? If so and these people know that business is leaving you can probably pick up those customers without any help from the current business owner. So, unless you are getting a killer deal on a list of assets – Go out and start your own business in the same niche (line of work). If you can do this then buying a business does not make good business sense.
- List of assets – Complete list of all tools and machinery – Whether in a shop or in an office.
- Has the business ever been been a crime, a crime scene victim, or been vandalized?
- What is the business zoned for? Is the area hazardous? (as relevant)
- Buying a franchise is a whole different ball game. In nearly 100% of the cases, you are always better off creating your own business than you are buying a franchise. Spend the money instead of buying a business franchise on educating yourself on how to compete with that franchise, or on how to develop and produce and market your own product.
That is because 49% ownership of a business = 0 (zero).
- Ask for the company’s audited financial statements. Request balance sheets, income statements, and cash flow statements, as well as business tax returns for the last 3-5 years. Before getting too serious about buying a business, Review those statements with your accountant and ask yourself these questions:
- Is the business collecting the A/R (accounts receivable) in a timely way?
- Is there a Line Item for “Bad Debt” If so, then how much of that is written off every year? This is a warning that there are customers the business can’t collect from and if there is a trend then this is a business in trouble or on the verge of collapse – Hence the REAL reason for selling.
- Is the business paying company debts timely?
- What is the profit margin of this business?
- Does the company have outstanding liens, lines of credit, loans?
- Does the business have adequate inventory systems in place?
- Is the company’s supply chain diversified so that the business isn’t overly reliant on one supplier? Or One Customer – Keeping in mind that when you are buying a business, putting all your eggs in one basket is never smart.
- Is the company’s customer base diversified. Is the customer base growing?
- Does the company have essential equipment and an infrastructure in place for their continued growth?
- What To Always Keep In Mind When Buying A Business:
1. Manage Your Buying A Business Risk!
- Tax returns
- Customer lists
Make sure the company does not face a lawsuit or criminal investigation. Be extra cautious if the company has never undergone an audit from an outside accounting firm. The company’s customers can also be hugely helpful. Ask the sellers for a list of their most favored clients-and then call those customers who didn’t make that “A” list.
2. When You Are /buying A Business Find The Best Advice Money Can Buy You.
In other words, get yourself a good forensics accountant or bookkeeper who knows and understands financial concepts, know your business banker personally, and find an attorney efficient in looking at companies for sale and who will perform these tasks:
– draft or review purchase agreements
– draft or review non-compete agreements
– draft or review employment agreements
– assist in legal due diligence (reviewing liabilities of target company, reviewing contracts of target company, etc. . . ,
– coordinate with other legal specialists who will work on transaction (tax attorneys, HR attorneys, securities attorneys, regulatory/compliance attorneys)
-rinse and repeat all the steps above for your next buying a business deal
In addition to these tasks, when you are buying a business these attorneys can also:
– Help clients identify prospective merger/acquisition candidates and/or prospective buyers
– Due Diligence, Due Diligence, Due Diligence on both sides — what is the other side actually buying/selling?
– Advise on how to structure the company post acquisition/merger, etc, . . .
– Advise on how best to structure financing (different classes of equity v. debt, etc, . . .
– Help you secure financing from investment banks, pe/vc firms, etc., and may help with evaluating the company valuation
– Help a client navigate board and/or stockholder dissension issues, and other types of defensive or strategic planning
– May work with other attorneys to seek regulatory approval for the deal – as necessary.
– Advise you on the legal ramifications of a merger, a sale, and even on changing corporate structures, benefits plans, layoffs, etc, . . . — Tax, ERISA, Executive Compensation, Labor, Environmental, Government Contracts, Real Estate, Securities, etc, . . .
If you cannot afford an attorney or an accountant or a visit with a Personal Business Banker, Can you really afford to be buying a business?
Legal issues to keep in mind when you are buying a business:
Contracts May Constitute These Agreements:
- Business professional and consulting agreements
- Insurance policies
- Intellectual property documents (copyright, patent or trademark)
- Documents related to lawsuits the company is involved in.
Review ANY contract agreements when you are buying a business with these questions:
- Are any of the agreements enforceable?
- Does the company own or have in their possession the rights to its own intellectual property?
- Is the business properly and adequately insured?
- Are the company’s permits and licenses current?
- Is the company involved in any litigation. If so, what are potential risks, costs, and damages?
Ask For These Important Pieces of Information when buying a business:
- Corporate charter and bylaws
- All minutes of meetings held with the board of directors and/or shareholders
In Buying A Business You Need to Know:
- Is the business structured properly for your growth plans, or do you need to change the structure to something more suitable for your business plan?
- Will you need to buy out shareholders, and if so, what is that cost going to be?
3. Make the people of the business a factor in your decision about buying a business. Do background checks on key company officers. Embezzlement Issues and potential problems are addressed and avoided (or dealt with) this way.
4. Employees: Do you keep current employees in place or do you make changes? When Buying a business, Employees can be one of the highest expenses.
Request These Employee Items When You Are Buying A Business:
- Organizational charts
- Employee handbooks
- Employment agreements
- Wage and salary information – including raise and bonus information
- Benefits plans
- Non-compete agreements
- Confidentiality agreements
- Disciplinary Action on Any Employee and the resolution.
Ask These Important Employee Questions And Avoid Buying A Business Employee Nightmares:
- Are there any employee policies that put the business at risk of lawsuits?
- What, if any, ongoing grievances with employees are there?
- Have employees initiated a unionization. Is there a third party trying to unionize employees?
5. Why is the current owner selling? Primarily the response to this question is health, moving, and other various versions of this. Rarely do you find the true answer to this question unless you are doing your due diligence. If you do your due diligence and still don’t really know why the owner is – Truly – selling their company, then watch out for other red flags. Trust your instincts.
6. Be prepared to negotiate a fair price when buying a business. You can and should use any negatives that the audit exposes to negotiate the sale cost lower when you are buying a business.
Due diligence, Due Diligence, Due Diligence is what will help you negotiate a better price as long as you don’t try to milk a lemon. If you are buying a business then you are adding a talented group of people to your organization. Whether or not those people stay and help you after the deal is sealed is less important because they can aid you in advisor roles after the sale and down the road. Negotiate buying a business with a fair price in mind. Buying a business peace of mind.