Buying a business could be one of the best decisions you make for your future if you do it properly.
Due diligence is critical in this process. It enables you to learn everything you need to know about a company before investing your money.
There are important aspects to consider, including:
- Buyer and seller interest
- Financial position
- Business assets
- Business structure
- Current liabilities
- Legal agreements
Let’s take a closer look at these factors and determine why they should play a role in your buying decision.
What to Look for When Buying a Business
As an investor with or without experience, the more you know about a company, the more confident you can be about your investment. These are the core areas to focus on.
Buyer and Seller Interest
Start with understanding why you want to buy the business.
- What are your personal financial goals and needs?
- What do you hope this business accomplishes for you?
- What interests you about this company?
- What are your expectations?
Once you’ve answered these questions you can filter the business through your priorities to ensure it aligns with what you’re looking for. This will give you a better idea of whether you should move forward.
You also need to understand why the seller is selling. Maybe there are financial concerns, the owners are retiring, or maybe they are moving on to a new business venture.
Understanding why they are abandoning what they worked to build can give you insight into what to expect if you step into their role as the owner.
A core component of the due diligence you’ll do prior to buying a business is gathering insight into the financial position of the company.
Ask for at least three years of financial information. That should include complete and accurate:
- Financial statements
- Tax returns
- Accounts receivable
- Accounts payable
Be sure to verify the completeness of the information they provide to you.
This information allows you to understand where the business stands financially before moving forward. Without this information, you won’t know how much capital you’ll need to put into the company to get it back on track to profitability or if the business is worthy of your investment.
Most often, you’ll be purchasing the company’s assets. That means you need to have a list of everything the business currently owns.
Enlist an expert to inspect all of the assets (machinery, equipment, etc.) to determine value and condition. They’ll give you a full review and an estimate of how much it will cost to update or replace the required equipment.
Understand the business structure. What is it operating as of now? Does this need to be changed?
This is important because each business structure is taxed differently.
You also need to analyze the legal condition of the business. Ensure it is operating with proper licensing and regulations. You want to avoid legal issues in the future.
The next thing to look for is the company’s existing liabilities or financial obligations. Often, when you buy a business, you’ll also be responsible for these.
If there are outstanding liabilities the current owner does not plan to pay off, it can indicate hidden financial struggles.
This is one way to look for any potential business or legal issues. The more insight you have in this area, the better. You want to avoid stepping into unknown debts and unknown financial obligations.
Often, these are the reasons business founders leave companies.
Lastly, take a look at the relationships and legal agreements in place with the business and its customers, vendors, suppliers, etc. Understanding these contracts will help you meet stakeholders’ expectations should you purchase the business.
You should also look into employee agreements and insurance policies. It’s a good idea to be brought up to speed on what the employees are being paid and any stipulations or contracts related to their employment. The more information you have about this during due diligence, the smoother the transition will be after you close your purchase.
Need Help Buying a Business?
Before you buy a business, talk to an attorney and an accountant.
These professionals can look through all aspects of the potential sale as well as help with due diligence in each of the areas we’ve covered. They’ll help you make the right decision and guide you through the entire process.
If you’re interested in buying a business, reach out to Vertical CPA. We are experienced accountants who want to help you properly prepare for your future!