Buying an existing business is a big step for anyone. Before you sign on the dotted line, keep these 5 important points in mind:
1. Do Your Due Diligence
Make sure to do your research. Roll up your sleeves and do your due diligence. Conduct a thorough investigation to minimize your risk of a bad investment decision.
For a better understand of the financial condition of the business, carefully review its current and past balance sheets, cash flow statements, accounts payable and receivable and tax returns.
Make sure to explore other important aspects of the business’s history as well:
- Are there any licenses or permits essential to the business, and if so, are they up to date?
- Does the business occupy a leased space, and if so, how long will the current lease last? Is a transfer of the lease permitted without approval from a third party? Can all necessary approvals be secured?
- Are there any pending or past lawsuits against the business?
This is by no means an exhaustive list of questions to ask. But a truly thorough review will not only alert you to potential problems, but will also make for a more efficient discussion of price and transition once the deal is closed.
2. Determine a Fair Price
Establishing a fair purchase price begins with determining the value of the business. There are a number of valuation methods, which may analyze factors such as:
- the value of the current, tangible assets of the business;
- the business’s historical earnings;
- the expected return on your investment—the amount of money you’ll realize after paying off debts and taxes; and
- the market values of similar businesses or assets.
Remember: the actual purchase price is affected by the terms of the sale and will differ from the valuation of the business.
3. Buying Assets vs. Equity
Determine whether you are buying the entire business or just the business’s assets, such as its inventory, equipment and intellectual property. You may be able to protect yourself from preexisting debts or lawsuits by creating your own limited liability entity and buying the assets of the target business instead. In addition, in certain circumstances, an asset purchase may receive more favorable tax treatment than an outright purchase of the business’s stock or other equity.
4. Don’t Rush
Remember to take your time. Rushing through the purchase process, especially the due diligence phase, can lead to mistakes and unwanted consequences. From your initial decision to purchase a business until the moment you close the deal, be sure to gather all the information you can to make good business decisions.
5. Have Professionals on Your Team
Buying a business requires time, patience and expertise, even for an experienced entrepreneur. Prior to closing the deal, you will have to review financial statements and organizational documents, calculate the value of the business, negotiate the terms of payment and draft the sales agreement and other documentation.
It may benefit you to assemble a professional team, such as an experienced business lawyer and accountant, to assist and advise you as you navigate this process.
Contributor: Yasmin Sinclair