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Buying A Business - Due Diligence Checklist

Ready to Sell Your Business?

If you want to buy a business, you need to do a lot of research and planning. Buying a business is not a simple decision. You have to look at many factors, such as the physical assets, the financial records, and the relationships with customers, suppliers, competitors, and the community. You also need to get professional help from experts who can help you evaluate and price the business, especially if you don't have much experience in running a similar business. Here are some pros and cons of buying an existing business:


Pros

  • The business already has customers and suppliers who know and trust it.

  • The business has a proven track record of making profits, which makes it easier to get financing.

  • The business can start operating right away, and you can generate cash flow from selling the existing inventory.


Cons

  • The price may be higher than starting a new business because you are paying for the goodwill of the business.

  • The business may have hidden problems that you don't discover until after you buy it, such as debts, lawsuits, or faulty equipment.

  • The inventory may be outdated or unsellable, and the equipment may need repairs or upgrades.


Tips - Here are some tips to help you buy a business successfully:


1. Ask the seller to provide you with written and verified information about every important aspect of the business, such as:


• The financial statements, which should be attached as exhibits and audited by a certified public accountant.


• The liabilities of the business, such as tax claims, lawsuits, or supplier bills.


• The assets of the business, such as leases, contracts, accounts receivable and payable, inventory, fixtures, equipment, signs, computer hardware and software, and anything else that contributes to the success of the business.


2. Consider the return on investment (ROI) of the business. A fairly safe investment should give you at least 5% annual return. You can also hire a company that specializes in valuing businesses to help you determine if the price is fair.


3. If you are paying more than the value of the assets, you are paying for goodwill, which is an intangible asset that represents the reputation and customer loyalty of the business. You can amortize goodwill over 15 years for tax purposes.


4. Talk to your banker about financing options. You will need a purchase and sales agreement that states the agreed price, what is being bought, what actions are required by both parties and how long the agreement is valid. Your banker will use this agreement to assess how much they can lend you and what collateral they need.


5. Find out why the seller is selling the business. Is it because they want to retire, relocate, or pursue other opportunities? Or is it because they are facing problems with cash flow, competition, or regulations?


6. Find out how long the business will last. Are there any factors that could end or reduce the business, such as new technologies, changing customer preferences, or environmental issues?


7. If there is a lease involved, talk to the property owner and make sure that the terms and conditions will not change after you buy the business. You should also discuss how to renew or terminate the lease in the future.


8. Ask the seller to sign a non-compete agreement that prevents them from starting or joining a similar business for at least 10 years. This is especially important if you think their personality was a key factor in their success.


9. Talk to other businesses in the neighborhood that are not direct competitors. Ask them about their opinions on the growth and challenges of doing business in your area, and how they feel about the business you are buying.


10. Check with suppliers to make sure that the inventory you are buying is priced correctly and in good condition.


11. Check if the prices of the business are competitive. Visit the competitors and see if they are making any changes that could affect your business.


12. Prepare a business plan that outlines your goals, strategies, and projections for the business. You can also find sample business plans for your industry in your business library or online.


Due Diligence Checklist


Before you finalize the deal, you should do thorough due diligence on the business. This means checking and verifying all the information and documents that the seller has provided to you. Here is a checklist of what you should review:


• The articles of incorporation, bylaws, minutes, resolutions, organizational chart, shareholders list, and other corporate documents of the business.


• The financial statements, auditor's reports, tax returns, credit reports, projections, budgets, and other financial documents of the business.


• The fixed assets, UCC filings, leases, sales and purchases of major equipment, and other physical assets of the business.


• The real estate leases, deeds, mortgages, title policies, surveys, zoning approvals, variances, or use permits of the business.


• The patents, trademarks, trade names, copyrights, technical know-how, trade secrets, work agreements, consulting agreements, licenses, assignments, patent clearances, and other intellectual property of the business.


• The employee's list, resumes, employment agreements, consulting agreements, nondisclosure agreements, non-competition agreements, personnel handbook, employee benefits policies and plans, collective bargaining agreements, employee problems, and disputes history, worker's compensation claims history, unemployment insurance claims history, stock option and stock purchase plans, and other employee and employee benefits documents of the business.


• The governmental licenses, permits, consents, correspondence, reports, and other regulatory documents of the business.


• The environmental audits, hazardous substances list, disposal methods, environmental permits and licenses, correspondence, notices, files, litigation, investigations, superfund exposure, contingent liabilities, and indemnification obligations related to environmental issues of the business.


• The subsidiary, partnership, or joint venture agreements, loan agreements,

bank financing arrangements, lines of credit, promissory notes, security agreements, mortgages, indentures, collateral pledges, guarantees, installment sale agreements,

distribution agreements, sales representative agreements, marketing agreements, supply agreements, letters of intent, contracts, and closing transcripts from mergers acquisitions

or divestitures options and stock purchase agreements involving interests in other companies' standard quote purchase order invoices and warranty forms nondisclosure or noncompetition agreements and other material contracts of the business.


• The list of existing and under-development products or services correspondence and reports related to regulatory approvals or disapproval, complaints or warranty claims, and other data regarding products or services and other product or service documents of the business.


• The list of largest customers and sales history, supply or service agreements, purchasing policies, credit policy, unfilled orders, major customers lost history, surveys and market research reports, marketing plans and budgets, printed marketing materials, major competitors list, and other customer information documents of the business.


• The list of pending litigation unsatisfied judgments and other litigation documents of the business.


• The list and copies of general liability personal and real property product liability errors and omissions key-man directors and officers worker's compensation and other insurance policies insurance claims history and other insurance documents of the business.


• The list of law firms accounting firms consulting firms and similar professionals engaged by the business during the past five years.


• The copies of articles and press releases relating to the business within the past three years.



10X Business Brokers offer expertise as Business Advisory Consultants and respected experts in the Business Broker marketplace. Kat Ramirez is currently the CEO and Founder of several businesses including adBidtise, #SocialBuzz, Golfing Buddy, and The Standout & Grow Podcast. 10X Business Broker is a women-owned, minority-owned, and veteran-owned business.


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