So you want your own business, but prefer to buy a going concern. A few words of advice follow to ensure you end up with the business you want. At the end is a list of the items you should request from the current owner.
Many businesses which are available for sale do not want employees, vendors and others to know of the fact before closing as it may damage the business. You should be asked to sign a non-disclosure before you are told the name and location and you should be asked to submit a financial statement showing you are capable of purchasing the business. A pre-qualification from a bank is helpful.
1. Choose a business you can run. Certain kinds of companies seem to have a certain cache to buyers (restaurants, distribution companies come to mind). If you have no experience in that industry you are taking an extraordinary risk. For buyers who will need financing, expect the bank to require that you have experience in the type of business you are buying. If you are self-financing you are at liberty to buy whatever you want, but you could get resistance from a seller who is very protective of the company s/he founded. That business is someone’s baby and they have an interest in ensuring that their employees will continue to have jobs.
2. You need an advocate who is knowledgeable about the process, can evaluate a business, and will guide you through all the potential pitfalls. The fact that your CPA can read a financial statement does not translate to an understanding of how a business is valued. The ability to get a real estate deal to closing is not the same as closing on a business sale.
3. Ask why the business is being sold. If the owner is retiring or has some other apparently acceptable reason for leaving the company, fine. But if he or she just wants out that may be a clue something is amiss – or will be soon. New legislation affecting the business? New competition? Political or demographic changes? Some other issue about to rear its head?
You might also want to consider asking the owner to stay on as a consultant to ensure a smooth transition and provide you training.
4. Do due diligence on the numbers. You should have a minimum of three years of tax returns and audited financial statements, including the complete auditor’s report, if same exist. Spend a lot of time understanding this business through its financials.
The owner may tell you that profit is understated. Find out what expenses are overstated (paying for personal expenses through the business, putting family members who don’t work on the payroll, understating revenue are all common.) but only believe what you can verify. Revenue may be verifiable through sales tax reports.
Remember you will be inheriting the liabilities, so take a close look at what that will mean.
If you will need financing, be certain the business has enough cash flow to cover the payments. Look for trends in the numbers. Get a Dunn & Bradstreet credit report.
5. Get the contracts – all of them. There may be client contracts, service contracts, the lease, contracts with suppliers, employees, consultants…the list is endless. Make sure you are aware of all of them because they are about to become yours.
The lease may be critical to the business’ success. If so, be sure you have awritten statement from the landlord that the lease will be transferrable.
6. There may be a range of issues to negotiate depending on the type of business:
- EPA concerns. Be sure you are not liable for the missteps of previous owners and the EPA has given the business a clean bill of health where that is appropriate. Get copies of all EPA licenses and permits, information on any pending EPA exposure or possible liabilities. Depending on the type of business, you may want to consider paying for an EPA audit.
Key employees. You should request the resumes and any agreements.
Ask if the owner is willing to finance all or part of the purchase.
Company name and logos, intellectual property, copyrights, patents, designs, etc.: do they transfer with the business? Are there any claims against any of them?
Below is a list of items you should have in addition to financial information mentioned above:
- Articles of Incorporation, Bylaws and all amendments to either.
- Minutes of Board meetings, names and affiliations of directors.
- Names of all shareholders.
- All relationships with or obligations to other companies
- Pending or threatened litigation
- A comprehensive list of all property owned or leased.
- List of Fixed Assets
- Licenses and permits
- Documents from any regulatory agencies.
Other Financial Documents
- Inventory schedule.
- Projections, budgets,
- Accounts receivable and payable
- Loan agreements, lines of credit, promissory notes
- Installment agreements
- Collective bargaining agreements
- List of employees with current position and salary
- Employee agreements or contracts
- Employee handbook including sick leave, vacation and all other policies
- Schedule of benefits
- Any employee disputes such as harassment, discrimination and wrongful termination.
- Worker’s Compensation claims
- Unemployment insurance claims
Agreements with sales organizations