Advice for Buying an Established Small Business – Does your business due diligence checklist confirm the business sellers’ financial claims?
Are the sellers' financial claims genuine?
When you are considering buying an established small business, the seller must allow you to view their financial information in one form or another, but how do you know if they are accurate? To verify the sellers' financial claims, the first test is to ask them to substantiate the figures. If the seller cannot or will not back up the information with evidence - politely walk away - do not waste your time. You must be able to thoroughly research and investigate all the information to make certain you are not getting sold someone else's problem.
Take into account, there are many variables to calculate when buying an established small business, a well planned and precise due diligence checklist pinpointing each and every stage will be essential to guarantee nothing is overlooked.
On some occasions you may find the seller has a different figure to what is actually on the books. There may be a compelling reason for this - perhaps there is a percentage of cash which is not always recorded and not relied upon. It is up to you to look into this to ensure you understand why this occurs, what the actual dollar amount is and when it is received.
However, do not take anything at face value. The saying "You get what you inspect not what you expect" applies here.
Be mindful - Most sellers are good honest people some however are extremely devious and will do almost anything to off load a failing small business or exaggerate the true value of the business.
In addition, I have listed just a few of the areas to inspect (at the 2nd stage) when buying an established small business - fully inspect the business premises, if it is a leasehold business the lease will require checking plus:
- Any plant and equipment,
- A comprehensive inspection of the stock
- Request any supplier or service agreements etc ,
The small business due diligence process can be lengthy and a very time consuming task for you and the vendor. To help you fast track the preliminary viability of a business and establish a better understanding of the day to day operations, it will be important for you, the business buyer, to treat it like any other business process and ensure the inclusion of a well structured due diligence checklist covering each and every stage of the investigation period. This way you can quickly assess a business;nothing is over looked and you can then confidently move to the next stage or the next established small business.
Remember to take your time and do not be persuaded to rush through any part of your due diligence checklist. This is a big decision and your future financial situation is at stake. If you have covered absolutely everything at every stage of the process there will be far less room for mistakes or even regrets.