If you are considering buying a business, it's important to perform "due diligence" to determine the correct value for the business, and identify potential problems. You'll want to assemble a team of advisors to assist you, including your accountant, your attorney, and one or more experts in the type of business you're acquiring.
You and your advisors will have many questions of your own.
In this article, we'll consider the basic questions you should consider for any business you are evaluating.
Financials:
1. Financial Statements. Review financial statements for the past five years, including profits and loss statements.
2. Tax Returns. Review the past five years of tax returns. Have your accountant compare tax returns to financial statements to find discrepancies.
3. Sales Records. Compare sales records to financial statements. Spot check with key customers to verify purchases. Also compare sales patterns to expected seasonal norms for the type of business you are evaluating.
4. Accounts Receivable. Review all receivables, and break them down by age. Look for unusual number of past due accounts. Consider credit checks for customers with large outstanding balances, which may not be collectable.
5. Accounts Payable. Review al payables to determine the business's short-term debt. Look at payment patterns to determine if the business is delaying payments to creditors.
6. Debt Disclosure. Require disclosure of all outstanding debts, including notes and loans.
7. Property. Evaluate company-owned property, including real property, furnishing and equipment, and inventory. Review depreciation of property to determine book value.
8. Credit Check. Finally, run a credit check on the business to determine its credit worthiness.
Legal:
9. Corporate Status. Have your attorney verify the business structure and corporate status, and verify that all legal filing and record-keeping requirements have been met.
10. Contracts and Legal Documents. Include lease and purchase agreements, royalty agreements, copyright, patents, and trademarks.
11. Lawsuits. Determine if the company is party to any lawsuits, and have your attorney review the company's position and potential liability.
12. OSHA and Environmental Requirements. Determine if the facilities and business processes comply with applicable laws and regulations. You may want to request an inspection from the Occupational Safety and Health Administration.
Personnel:
13. Review the Organization Chart. Interview key staff members to get their impression of the business, and determine if they are likely to remain after the business is sold. Consider contracts and bonus plans to keep key employees on board.
14. Employee and Contractor Agreements. Review contracts and agreements with employees and contractors; consider employing a Human Resources or Employment Law consultant to insure that the company is operating within the law.
Business:
15. Business Reputation. Conduct a web search to see what customers are saying about the business. Check with the Better Business Bureau and Chamber of Commerce for complaints. Interview key customers to get their perspective.
16. Marketing and Sales Strategies. Review the company's marketing and sales plans. Review marketing materials and sources of customer leads; compare with similar businesses to determine if the company has clear market differentiation.
17. Price Checks. Review current pricing and price change history, and compare to competitors' pricing. Recent price cuts may be a sign of a struggling business.
18. Business Processes. Review the key processes and compare them the "best practices" for the industry. Watch for processes that are tied to out-of-date software and systems.
19. Location. If the business depends on local customers, evaluate local economic and market conditions that may affect future business. Also consider changes in the local competitive landscape, such as new competitors entering the local market.
20. Insurance. Review the company's insurance coverage, and compare it to industry norms.
Summary:
This list may seem intimidating, but it actually represents the minimum level of investigation that you'll need to do before purchasing a business. You and your advisors will probably add many questions to this list!
You will almost certainly encounter problems and areas for concern during your investigations; no business is perfect. But having done your "due diligence," you'll be able to determine a reasonable valuation for the business, and make your purchase decision.
For help buying a business or selling a business, contact Hub Synergies Inc, your Bay Area business brokers.
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