Starting your own business entity from scratch is definitely not for everyone. While running any business involves a ton of hard work and dedication, starting from square one involves even more. That’s why so many business owners choose to purchase another person’s business that’s already running strong. But before you sign that check to purchase an existing business, have you done your due diligence and made sure that everything the seller or the business broker told you is correct? We’ve complied ten of the top considerations to check in your due diligence process to ensure the business you’re buying is all its represented to be.
Current and Accurate Financial Information
You’re buying a business to make money. That much is given. But is the business you’re purchasing actually as successful as the seller’s made it out to be? For starters, you’ll want to have the financial statements for the last three to five years audited. Also, check any credit or analyst reports that may be available on the business. Read through schedules of inventory, accounts receivable and payable, and check for any additional indebtedness.
Make Sure the Business is in Good Standing
All too often, a business owner forgets to submit annual or biennial documents to the state’s Secretary of State, causing the business to be suspended. Do yourself a favor and make sure the business is still in good standing. And while you’re at it, read through the Articles of Incorporation (or Organization), the Bylaws (or Operating Agreement), and all other documents contained in the corporate binder, including minutes and additional records.
Check for Employment Law Violations
Employment law is an absolute quagmire for a lot of employers. Minute differences between exempt and non-exempt employees as well as the failure to update an employment handbook can spell disaster for an unaware employer. So be sure to check through all of the employment records for current and former employees of the business to determine their categorization, benefits paid, and any workers’ compensation or unemployment insurance claims they’ve made, among other things.
Taxes, like employment laws, can be a tricky situation for a business owner to navigate. While many businesses employ attorneys or CPAs to fulfill their accounting needs, far too many believe they can do their taxes themselves and fail to meet requirements set forth by the IRS or state or local taxing authorities. When you’re going through the company’s financials, be sure to look through all tax filings s well, and focus your attention to any tax liens or discrepancies that could spell trouble later.
Look for all Necessary Licenses or Permits
Many businesses must maintain active licenses or permits with various state and federal agencies for them to conduct business legally. Unfortunately, quite a few of those businesses—particularly the smaller ones—often neglect their licensing requirements. If you’re contemplating the purchase of a business where a license or permit is required, make sure the business has it, and it is up to date.
Examine the State of Physical Assets
There are few businesses that can get away with having little to no physical assets as a part of their business model. While a schedule of assets can take you a long way to understanding the types and status of the assets the business owns, that is only the first part of the puzzle. You’ll also need to look to any equipment leasing contracts the business has with manufacturers or dealers, any UCC filings for the equipment, and lists of all purchases and sales of capital equipment.
Intangible Assets such as Intellectual Property
While physical assets are often thought of as one of the most important factors in the purchase of a business, intangible assets, such as intellectual property, can often be more valuable than the physical assets of a business. What are intangible assets? We’re primarily talking about trademarks, patents, and copyrights the business owns. Be sure to check if the business’s name and product names are trademarked (and still actively maintained). Go over methods for protecting trade secrets with the managers. Comb over patents and licensing agreements to make sure they’re valid.
Vendor, Supplier, and Other Contracts
A business is often only as good as its supply chain. And as an integral part of that supply chain, you need to be sure that your contracts with vendors, independent contractors, or any other suppliers of materials or labor are all valid and intact. Start by getting a list of all of the third parties the business deals with on a regular basis. Check to make sure their contracts are all valid and there are no breaches between the parties. Also, while you’re checking these contracts, take a look at any real property leases or mortgages.
Environmental Issues or Other Litigation
One of the most hot-button issues currently for purchasers of new businesses is whether the previous owners have any environmental problems that may pop up later. From pollution to exposure violations, even the smallest environmental issue can spell big trouble for the business. Be sure you check out any types of hazardous materials the business uses as well as how those materials are handled and disposed of. Also, check for hazards in the form of litigation that could harm the company later on, including any current or threatened litigation by or relating to the company.
Get as Much Customer Information as Possible
A business will not have any success without a strong customer base. And any business that is worth its price will have a detailed list of customer information on hand for your perusal. If possible, read through a list of customers to find out who they are, where they live, and what products they purchase. The more you know about your customer base, the better position you will be in when it comes time for you to take the reins of the company from the seller—meaning you’ll be able to enjoy profits as quickly as possible.
Photo Courtesy: Sebastiaan ter Burg
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