Examine a Business before buying
Here are the top 5 things you must do before buying any business. The time and effort you will spend upfront in the due diligence process will go a long way to determine your future success.
#1: Analyze the Business Environment
Once you have narrowed your choice of business that you want to buy, conduct a thorough analysis of the business and its surrounding environment. Look into every aspect of the business including its suppliers; marketing material; list of competitors; location competitiveness in case of a retail outlet; leases and contracts; bank loans, collateral and covenant obligations. Make sure your due diligence discovers all obligations that the business may have entered into during the course of its existence.
#2: Hire Professional Help
A qualified attorney and an accountant will be your best allies as you evaluate the legal and financial condition of the business you are about to purchase.
You will require help from an attorney to review several legal documents including existing lease agreements; contracts with customers and suppliers; and also prepare documents that will legally transfer the ownership of the business or its assets in your name.
At K&M Accounting and Tax Services we help clients review the business financial statements and tax returns to determine the profitability of the business. Structuring the actual transaction also has several tax benefits for the purchaser and the seller. These can become important leverage points during price negotiations.
#3: Cross Examine the Financial Statements
If the business has been in existence for a long time, make sure you review financial statements for at least 3 to 5 years. Don’t accept a simple financial review by the seller. Validate the records by looking at the sales and payroll tax reports, supplier invoices and levels of inventory carried throughout the year.
The true value of the business is the free cash flow that it can generate over the next 3 to 5 years. A thorough cash flow forecast will enable you to determine the true value of the business.
#4: Comparison with Industry Benchmark
Every industry has a bench mark study of the financial and business performance ratios that can be used to compare your business against other similar businesses in the industry. If you are buying a franchised business, you may be able to request a benchmark report that compares the business against other franchise locations from the broker representing the seller.
This is perhaps the most valuable data point that can help you analyze and discover turnaround opportunities. You will be able to find out what may be wrong with the business, where can you make improvements and turn the business around.
#5: Management Difference
Before you sign up for the business, take a hard look at your own management skills and expertise. Many businesses require special skills and years of industry experience to be successful. If you are a software programmer venturing into a retail fast food business for the first time, perhaps you may want to consider taking someone with the relevant skills and experience in the industry as your partner.
Being an entrepreneur requires one to wear multiple hats managing marketing, production, delivery, vendor purchases, customer service, financing, legal and tax issues all at the same time. This can sometimes prove to be a difficult move from the comforts of a corporate job although those that are able to make the shift successfully reap huge benefits.
Keep in mind this column and the articles published here are only meant to provide you with high level information about tax and business matters and in no way should you consider this as tax advice. Consult your tax and legal advisors regarding your individual tax and business situation.