Buying a business can help us avoid pains building up a business from scratch. On the other hand, buying a business may pay high costs. Before any decision, we need to check all sides of the business thoroughly to make sure that we pay the right price and reduce the risks. Here are some checking points for buying a business.
Financial reports
First of all, we want to know how much the business is worth and how healthy the business is. We need financial data to calculate the value of the business and understand the health of the business. To calculate the value of the business, we want to know free cash flows, profits, revenues for the past years. Thus, we would ask the seller for balance sheets, income statements, and cash flows for the past five to ten years. To better understand the business, besides above-mentioned reports, we also need to check tax returns, account payables, account receivables, outstanding loans and debts.
Existing contracts
Secondly, existing contracts are very important to the buyer. To understand where the business comes from, we need to know each of the biggest customers, how many businesses each of the biggest customers contributes to the overall business, the business growth of the biggest customers. We also need to check existing contracts with those biggest customers and the chance of new contracts with those biggest customers under new ownership.
Besides existing contracts with customers, we need to check existing contracts with suppliers. To have stable supplies and reasonable costs, we need to review contracts with existing suppliers to understand whether there are stable suppliers and what can be improved.
Employee information
Employees are the most important factor to success in a business. We need to check employee information, turnover ratio, and contracts with employees. We need to keep the key employees under new ownership.
Assets
Next, we need to check tangible and intangible assets. Tangible assets could be buildings, furniture, equipment, inventory, hardware, and software, to name some. The status of tangible assets provides information about the existing value of those assets in their lifetime. Intangible assets are of high value to the business.
Pending legal issue
Lastly, we need to check whether there is any legal issue with the business. We need to be clear there is not any pending legal issue.
Once we clear any legal issue, reach an agreed price, we need to discuss payment. It is better to have a down payment and an installment plan. This payment plan gives the new owner time to learn the business and secures the transition successfully.
Of course, before the information is shared, a non-disclosure agreement to be signed that secures the information shared is only for the purpose of assessment of the business.
Finally, it is better to buy assets than shares of the business. Buying assets means the shell operating the business leaves and you get all the assets to develop your business. The reason is the liabilities that may not be discovered when buying shares of the business. The liabilities not discovered may appear later. Even for the assets you buy, you have to make sure the assets are not being used as a guarantee for payment of mortgage loans for anything or be liens for anything.
Last but not least, it is better to hire a lawyer and an accountant when you buy a business.