When you think of an entrepreneur you often think of someone creating a business from scratch. The individual had a concept and went through the processes of setting up a business, growing a customer base, training employees, and watching their “baby” grow. However, sometimes buying an established business might make sense for you and your goals. When buying a business there are many considerations. The key is to do your Due Diligence. Below are a few things to consider. The list is certainly not exhaustive, but hopefully, you will begin to consider and investigate the company you are buying to avoid buyer’s remorse.
As I write this, President Biden is giving his State of the Union to the nation, and the Jobs Report from January shows an increase in jobs and an unemployment rate that hit a 53-year low. Despite concerns about inflation, and difficulty finding workers and or keeping them, people are still buying and that includes businesses. Due diligence is the process of verifying all the details of the business before the sale closes. The process typically comes after an agreement with the seller and a letter of intent has been provided. As a buyer moves through the process of reviewing the information most issues are uncovered. The seller and buyer can often resolve the issues through further negotiations, conditions, and exclusions.
Below are a few items to consider as part of your due diligence:
- Business structure and operations. This includes looking at the business structure and the sources of income. Who are shareholders, investors etc. You will want to review the Bylaws or Operating Agreements, resolutions, and other structural documents and state filings. Additionally, understand the operation, products and services, marketing strategy, industry trends, competitors, customers, and branding.
- Financial information. This includes income and cash flow statements, profit and loss statements, accounts payable and receivable, balance sheets, tax returns, debts owed by the business, expenses, and an inventory of assets. It’s essential to obtain an inventory of the company’s physical assets and real estate as well as its intangible assets, such as intellectual property like trademarks, copyrights, and cryptocurrency.
- Legal liabilities. Does the company have any lawsuits filed against it or issues that could lead to legal disputes down the road? What types of insurance does the business have and is it enough to resolve the cost of a judgment or settlement?
- Contracts. The sale generally includes the transfer of contracts the seller made with other companies and individuals. The contracts can be to clients but also contracts that sustain the operations of the business such as the copier contract or lease agreements for the office space. Reviewing the obligations in the contracts is important to determine the terms you will be bound by. Items to review include obligations you might owe to other companies, noncompete and nondisclosure agreements, non-assignment clauses, purchase orders and warranties, mortgages, letters of intent, sales and subscription agreements, loans and lines of credit, stock purchase agreements, and contracts between agents and principals of the business.
- Customer information. Confirm the customer base. Examine sales records, subscriber lists, marketing and advertising programs, customer research data, and purchase and refund policies. Look at the stream of income from the customers and consider that there may be some attrition after the sale.
- Employee information. If you will be taking on employees of the former business owner when you buy a business you will need to do a careful review of employment contracts and contractor agreements, outstanding unpaid vacation, employee benefit plans and tax forms, payroll data, and the company’s human resources policies.
There are many considerations when buying a business. Due Diligence is just one portion, but often gives you the biggest picture of what you are stepping into. If you are thinking of buying a business Meissner Joseph and Ruggles, Inc. can help you start your business from scratch or purchase a business guiding you through the entire process. To schedule a meeting with Mauriah Conway, please contact us 916-920-5983.