THINGS TO CONSIDER WHEN DECIDING TO BUY AN EXISTING BUSINESS
The decision to buy a business is an extremely important one, for such an acquisition almost inevitably brings significant changes in the buyer’s financial situation and personal life. Such purchases, then, should not be made before first thoroughly investigating all aspects of the business under consideration and the impact that ownership of that enterprise would likely have on the buyer’s personal and professional life.
Even before beginning the search for an appropriate existing business, would-be buyers are encouraged to honestly assess the level of commitment and resources that they are willing to bring to bear to make a new business endeavour a successful one. Small business experts encourage potential business buyers to frankly ponder the levels of time and energy that they can devote to a new enterprise. Are the number of hours available sufficient given the work involved? Does the business require a higher level of exertion than you are prepared to expend?
Experts also encourage potential business buyers to canvass their families about their attitudes regarding the sacrifices – both financial ad personal – that are sometimes necessary to move an acquired business forward. In addition, buyers should investigate whether the nature of the business will be a rewarding one for them. What are their motives in pursuing a business purchase?
Finally, potential buyers should determine the level of financial commitment that they are willing to make to the new business (and the level of financial assistance they are likely to be able to secure if needed). If, after a thorough assessment of these factors, the would-be buyer is still in the market for a business, he or she can proceed.
The first step a buyer must take in evaluating a business for sale is that of reviewing its history and the way it operates. It is important to learn how the business was started, how its mission may have changed since its inception and what past events have occurred to shape its current form.
A buyer should understand the business’s method of acquiring and serving its customers and how the functions of sales, marketing, finance and operations interrelate.
There are several questions prospective buyers should consider in evaluating a business for purchase. For example, it is important for the buyer to understand why the business is being sold, and what legal considerations may be involved in the sale. Buyers should evaluate the market value of the business’s assets as well as the market potential of its products and services.
Much of this information – and all important data on the company’s fundamental n financial health- can be gleaned through the examination of the enterprise’s financial statements and operations documents. The several areas of the business’s balance sheet that could be thoroughly looked over when evaluating a company include the following:
Account Receivable – can provide information to buyers on the diversification of customer accounts ( or lack thereof), accounts that are overdue or in dispute, accounts that have been pledged as collateral, and the company’s credit policies.
Accounts Payable – as with the Accounts Receivable, can provide information on diversification and status of accounts; can also help buyers identify undisclosed or contingent liabilities.
Inventory – can provide buyers with information on the size, age, and condition of the inventory, the method of inventory valuation, the process by which damaged inventory is valued, and other data on current owner inventory methods.
Real Estate -These records can help buyers establish the condition and market value of all buildings and land that are part of the business, and can be valuable in assessing whether to secure the services of an appraiser; also provides information on various aspects of maintenance, including business relationships and costs.
Marketable Securities – can aid buyers in determining the value and status (restricted or pledged) of any marketable securities.
Machine/Equipment – schedules of machinery and equipment owned or leased by the company can provide potential buyers with information on:
Condition, age, and maintenance needs of equipment and machinery.
Those items that are used to adhere to local, state, or federal regulatory requirements, and whether existing machinery is sufficient to meet those requirements.
Accrued Liabilities – schedules of accrued liabilities inform the buyers about the business’s accounting mechanisms for unpaid wages, accrued vacation pay and sick leave, payroll taxes due and payable, and accrued federal taxes, among others accruals.
Note Payable and Mortgages Payable – can help buyers identify causes of debt, determine terms and payment schedules of those debts and whether they are assumable); also delineates whether a change in ownership would accelerate the note or mortgage or trigger a payment penalty.
The balance sheet, though, is only one of the myriad aspects that need to be thoroughly evaluated by buyers. Other areas of the business that should be examined include its financial ratios, income statements, rental or lease arrangements, employees, station in the marketplace, and other legal issues (ranging from the status of patents to current level of adherence to legal requirements).
Profit and loss statements provide vital information on the business’s recent financial history and potential for future success. Experts commonly advice would-be buyers to examine income statements from the previous three to five years, and to substantiate the data contained therein via the company’s tax returns. However, the business’s earning power is a function of more than bottom-line profits or losses. The owner’s salary and fringe benefits, non-cash expenses, and non0reccuring expenses should also be calculated.
Information contained in the company’s income statements and balance sheet can be used to figure important financial ratios that can provide insights into the company’s fiscal well-being. Important financial ratios include current ratios, accounts receivable turnover, inventory turnover, and sales/accounts receivable.
Any examination of business is woefully incomplete without also checking on the business’s lease or rental regulations. All such agreements should be closely studied to learn not only about the length of the contract but other matters as well. For example, some landlords include a “per cent of sales” clause in their leases which require commercial tenants to pay them an additional fee over and above their rent (some all call for additional fees for common area maintenance, etc.).
Other lease agreements include option periods and/or demolition clauses. Lease contracts also detail maintenance parameters (will the landlord fix the air conditioning, or would you foot the bill?) and conditions – if any- under which the lease can be assumed or extended by a new owner.
A business workforce can be among its most attractive assets. Conversely, it can be a problem area. Key information that could be analyzed when looking at a company’s personnel includes job descriptions and current compensation (including benefits) for each employee, skills level, and morale.
In settings where unions are present (or imminent), buyers need to inform themselves about current contracts and management-union relations. Finally, buyers that are pondering acquiring a business in an industry with which they are unfamiliar need to determine whether they will be able to retain key personnel after a purchase is made.
Potential buyers should find out not only about the targeted company’s market standing – including market share, competitive advantages, and geographic strength – but also the strengths and weaknesses of its competitors.
Diligent buyers will make certain that they are well-informed about a company’s legal situation with the Internal Revenue Service to its vulnerability with litigation. Would-be owners should determine if any lawsuits against the company have been filed or pending. They should also make sure that the company is in compliance with state registration and local zoning requirements. Articles of incorporation, bylaws, partnership agreements, supplier contracts, and franchise agreements should also be carefully reviewed if applicable.