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ComplianceMay 11, 2021

What should you look for when buying a business?

Not all businesses start from the ground up. Buying an existing business is a great way to leverage an established brand and operational infrastructure to profit immediately. It can also be less risky than starting from scratch.

But before you begin the journey of buying a business of your own, there are many things to consider. Here are some things to look for.

Perform due diligence

Before you proceed with the purchase, it’s important to know what you’re getting in the deal by performing due diligence. You can think of due diligence as doing the research and the confirmation that you’re buying what you think you’re buying and not getting anything negative that you don’t want. It also helps assess the value of the business and can help you determine whether to proceed.

During the due diligence process, get as much information on the business as necessary in order to make an informed decision. These are some of the due diligence areas to be explored: reputational, business license, anti-money laundering/know your customer, negative news, and industry-specific research.

Evaluate the financials

Getting into the financials is one of the most important parts of your research. An accountant can help you review the seller’s business and evaluate key financial indicators such as sales, profits, debt, expenses, and cash flow. They can also reveal any potential red flags and anomalies.

Confirm the business’ entity status

If the company you intend to purchase is a corporation or limited liability company (LLC), it’s important to review entity documents and any related records such as bylaws, resolutions, and operating agreements. Check to see what state the business is registered in and whether it operates as a foreign corporation in that or any other state.

Also, verify with the state that the business is in good standing and that the owner has the legal rights to sell it.

Look into legal liabilities

If you are buying a business that’s in the middle of litigation, and now suddenly you own this company, you could be party to that lawsuit.

Research whether there are any legal liabilities you may be inheriting such as liens or judgments against the company or any of the executives you might be hiring on as part of this acquisition.

Understand the outlook for the business and its industry

Consider commercial aspects of the deal such as market outlook and trends, the business’ competitive advantage, its client base, and so on. For example, if you’re looking at a logistics company, is there just one client who makes up the most of their sales? What happens if that client decides to buy from someone else? Is there another company looking to move into town and steal market share?

Could these factors play a part in why the business is for sale? Always do your research on this one. Talk to the seller and people who are familiar with the business, such as local realtors, other businesses, suppliers, and the local chamber of commerce.

Finally, consider customer satisfaction. Understanding how the business is used and perceived by customers can help put any sales projections into a more realistic context and give you a better sense of where the business stands.

Get a picture of operations

Be sure to understand the what, where, and how of the business’ operations. Make sure that things are running as smoothly as the person selling to you says it is. You wouldn’t buy a car without sending it to a mechanic, so you want to make sure the operations of a business are also running as they should.

Things to put on your checklist include a working capital assessment; a manufacturing and operations evaluation; a supply chain review; an analysis of capital expenditures; among other items.

What assets are involved?

What are you getting in the transaction? The seller should have a detailed spec sheet of all the assets included in the deal and their value.

For intellectual property, confirm whether ownership of the brand name and any trademarks or patents are included in the deal. Evaluate how intellectual property is captured and protected. This due diligence will ensure you protect one of the business' most important assets, especially if it’s in the field of science, technology, or research and development.

Consider the firm’s reputation

In business, reputation is everything. Perform searches on review sites and media outlets for any red flags or negative information that affect the company’s reputation and may be financially impactful. Even past history of a cyber attack can impact a company’s reputation, especially if customer data was breached.

Verify business licenses and permits

This one is easily overlooked but should be a key part of due diligence. If business licenses aren’t in place or are not maintained the continued operation of the business may be interrupted once the deal closes.

Verify that the required filings for business licenses are up-to-date and the company can operate without interruption or incurring potential fines from federal, state, or local agencies. If the licenses are not in order, you may need to obtain them.

Check any zoning and environmental regulations

If the business comes with property, check zoning regulations to determine what type of business activity is permitted. Don’t assume that just because the current owner is using the property for a business purpose that they are doing so legally or that a new owner can use the property for the same purpose.

When purchasing property, also check whether the operating business faces current or potential environmental liability. This could include a lack of applicable licenses, hazardous material contamination, permit violations, and enforcement deficiencies.

Summary

There is a lot involved in buying an existing business. To help you evaluate the business and reduce risk, get professional assistance from an accountant, lawyer, and a business valuation professional.

And, once it’s yours, you will be able to revitalize the company with fresh ideas and fresh leadership.

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