Follow the ABCs of Buying a BusinessBy Nina Kaufman, Esq.
Make sure you dot all your i’s and cross all your t’s before signing on the dotted line.
Make no bones about it; buying a business is a big deal. Depending on whether you buy all or part of a business, your investment will likely result in the largest single asset you ever own.
Don’t be careless or naive. Don’t rely on someone’s word alone to verify the condition of the business. Don’t move forward without the sound advice of legal and tax counsel. Yes, there are a lot of don’ts. But what should you do?
Here’s a list of steps you can take (not necessarily in order of execution) to make sure you get educated . . . and protected:
- Ask lots of questions. In particular, get information about the finances, marketing, ownership and operations of the business.
- Be sure that buying the business fits into your life plan. Is this really the time for you to dive into entrepreneurship?
- Clarify with the seller why he or she wants to sell the business. Is he or she facing a lifestyle change? Does the owner recognize that the business can grow more from others’ greater expertise? Or is the owner dumping a dog?
- Do your due diligence. Look at corporate records and tax returns. Speak with company employees.
- Evaluate the condition of business assets, such as machinery, equipment and computers.
- Focus on the financial condition of the company as well as the state of the industry. Is there positive cash flow? How does the balance sheet look?
- Get in touch with a banker to determine your financing options as early in the process as possible.
- Have an advisory team in place: There’s no need to take such an important step as buying a business while groping in the dark.
- Investigate whether there are any outstanding lawsuits, judgments or criminal complaints against the company or any of its employees.
- Judge whether the physical work environment is well-kept or if it contains hazards.
- Kill the deal if you receive strong resistance to your reasonable requests for disclosure.
- Listen to the employees to gauge their awareness of the sale and their feelings about the potential transition.
- Make a note of any significant turnover of employees.
- Nail down a reasonable valuation of the business.
- Open discussions with the seller about whether he or she would be willing to stay on in a transitional capacity. Also, consult with your advisors to determine whether that’s wise under the circumstances.
- Paper the deal. Whatever arrangement you reach, absolutely, positively put it in writing.
- Query the quality of customer relationships.
- Rate the efficacy of the present management team (if any), as well as the pros and cons of keeping the team in place after the transition.
- Search for the right opportunity. The right one isn’t necessarily the first one that crosses your desk.
- Target your acquisition objectives, such as price range, number of employees, market share, profitability and location.
- Understand that a business acquisition takes time–especially to do the investigation that’s necessary. Expect it to take upward of three to six months (and that’s being aggressive).
- Verify, verify, verify. Goes hand-in-hand with “do your due diligence.” Review the certified financial statements, tax returns for at least the past three years and “notes of indebtedness”–equipment leases, loans, accounts payable, etc.
- Weed out unscrupulous or incompetent business brokers by asking for at least three references and checking those references before allowing them to represent you.
- X out any advisors who do not have the expertise you need and who seem to insist on blowing your deal. Business acquisition can involve some tricky arabesques; you want your advisory “net” to protect you from gravely hurting yourself . . . or making such lopsided demands that the seller will have no incentive to sell to you.
- Yield to the preferred sequence of events. Prospective purchasers may be eager to rush into signing letters of intent or somehow “nailing down” the seller to a commitment before doing adequate investigation. Yes, you might lose an opportunity by taking the appropriate time to follow the steps your advisors lay out for you. Stay optimistic; this simply means it wasn’t the right deal because the timing wasn’t right for you.
- Zoom in on the relationships that the business has with its vendors. Does it have different classes of vendors (preferred, regular, occasional)?
There are plenty of advantages to buying a business instead of starting one from scratch. Make the most of them by learning your ABCs.
Want to learn more about Kaufman Business Law? This is the video to watch.