Emotion and Due Diligence Should Play a Roll When Buying a Business
When buying a business, both emotion and due diligence are elemental and essential.
When you find that magical business for which you’ve been searching, the following are ten key issues to consider. They cover important points that are sometimes overlooked when your head is in the clouds during the emotional excitement of a deal.
1) Know that when you own a business it is a lifestyle change. The business becomes part of your family and demands attention. Make sure both you and your family are ready for it.
2) Is it a business that you know and understand? If not, do the research and make sure you learn about the business, its competitors and any changes that are due in the marketplace. There is usually public information available for almost any industry. Find out if there are any industry issues that will positively or negatively impact the business.
3) Make sure it is a business you want to be in. Can you picture yourself working it? It would be a good idea to meet with the owner and discuss in detail what he or she does on a day-to-day basis so you can get comfortable assuming that roll or bringing in people to help you. For instance, if the owner is the person who also keeps the office computers up and running or repairs the vehicles, then you either need to be able to perform those tasks or hire someone who can.
4) Get a complete set of financials from the business and review them with a good accountant, one that is experienced in business transfer transactions. Bank statements, financial reports and tax returns should coincide with what the owner is telling you. Lenders will not finance undocumented income.
5) Make sure the lease on the property is transferable to a new owner or that a sublease is acceptable. Get this in writing from the property owner. Be sure the rent is at fair market value, and if not, renegotiate it. If it’s a retail location, learn about the neighborhood and any zoning or construction projects that may affect the business.
6) Create a business plan based on realistic expense and income figures that you have from the existing business. Factor in your personal living expenses that you must draw from the business to live on, such as mortgage, car payments, groceries, taxes. If you are borrowing money to buy the business, you must also factor in debt service — the cost of the loan. Will the existing cash flow continue after the sale, and will it be enough to cover the expenses? If not, how much cash will you need to carry the operation until it gets up to speed?
7) Evaluate your impact on the business. Are you going to make a difference to the performance of the business? Are you looking to maintain the status quo, or are you looking for growth opportunities? If all goes well, will the business provide the lifestyle you want?
8) Check to make sure there are no pending lawsuits against the business, or any other liability problems. You should engage a competent attorney, one who is experienced in business transfer transactions, to review documents and make sure that you understand your rights and obligations in any contracts.
An attorney can also draft a non-compete agreement for the seller to sign, as well as employment contracts for key employees who are critical to the operation of the business. You don’t want the seller or manager setting up shop down the street while you are getting your new business up to speed. It is wise to interview key employees to make sure there is a good fit.
9) Check to make sure the inventory is accurate. Perform a complete physical inventory to check for quality and saleability of the stock. Is any of the product damaged, obsolete or exceeding expiration dates? Inventory equals cash, make sure you know what you have.
10) If any special permits or licenses are required, how difficult is it to have them transferred to you as the new owner? Do you qualify to have them in your name, or do you need to hire someone who does qualify?
Feeling an emotional connection to the business you intend to purchase is important since it will be a large part of your life. However, during the due diligence process make sure you use common sense in your approach. Weigh the facts and try to take the emotion out of it. Do your homework upfront. While you cannot examine every nook and cranny of the business as someone looking in from the outside, you can certainly find out enough to know whether or not it is a comfortable fit and if it is worth the risk. There is no such thing as a perfect business and there are always inherent risks associated with any business venture. With proper diligence before the purchase, you will likely enjoy the rewards of successful business ownership, both financially and emotionally.