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Considerations When Buying a Business
ENLIGN DEAL TEAM | 11/14/2022
When you're trying to buy a business, it's important to think things through. No matter how good the opportunity seems at first, you should ensure that you thoroughly analyze all aspects during due diligence. No matter how excited you are about the idea of owning a business, you should be on your guard toes during the due diligence process. Here are 6 of the most important questions you should ask yourself before signing a contract.
1. Do you have the business, financial, lending, real-estate and legal experience to conduct your own due diligence? Most business buyers are entrepreneurs and have a set of talents that have made them successful. However, that does not mean they have the necessary skill set to evaluate recast financial statements, leases, loan or transaction documents. Buying a business is often an individuals largest investment. To move forward without an experienced deal team can lead to financial disaster. Experienced business brokers will recommend transaction (not just 'business') council, financial advisors and commercial realtors to augment your evaluation.
2. Do you love the business? Having an emotional connection with the products or services the business provides is not required to build a successful business. But, you might want to stop and think about whether you really love the products or services that the business offers. If you're not excited about them it might be hard for you to commit for a long time or reach the personal and professional goals you have established.
3. Is there a written business plan? It can be helpful to look at the current owner's goals and decide which ones have been met. A business plan is not required to build a successful business, but serves as a road map. If the seller doesn't have a business plan, you or your loan packager will need to develop one for SBA underwriting. Even if one is provided you will want to update it to reflect your concepts.
4. How well does the company do? Look at how the business is doing as a whole. Do you think the business owner has to put in a lot of hard work and long hours? If so, keep in mind that this owner working so hard could be you in the near future. Is there a trustworthy manager who can run the business while you're away? Analysis should be done on not only the financials, but all aspects of the business including employees, vendors and service providers.
5. Are there concentration concerns? Who are the most important clients? Does the business depend on a few big customers or clients, or does it have a wide range of customers and clients? Obviously, if the business depends on just a few key customers, this could be a problem if clients leave. Also, do you know how to get more customers in the future? Before you buy a business, you should be sure you can make it grow and do well. Asking the seller how they would grow the business if they weren't selling is a great start and can supplement the business plan.
6. What do the books look like? After you've signed an NDA you'll want to look into the business's activities in detail. Make sure that you have everything, including:
- Tax Returns
- Profit and Loss Statements
- Balance Sheets
- Bank statements
- Vendor Contracts
- Employment Agreements
- Insurance Documents
In the end, you should be careful when buying a business and look out for warning signs. An experienced deal team comprised of a transaction attorney, CPA, commercial real estate agent and loan packager can take a lot of the heavy lifting off your back and insure a smooth transaction. Except with the smallest of acquisitions the benefits far outweigh the costs. You don't want to make a quick decision that you'll later regret.
Copyright: ENLIGN Business Brokers