Choosing to buy a business is a major decision that is not to be taken lightly. A lot can go wrong when buying a business, and if you don’t do your due diligence, you could end up buying a business that tanks within a year. But, the amount of information you have to deal with when buying a business can be overwhelming; it gets even worse if you are looking into purchasing multiple businesses at once. One way to make the process easier is to develop a checklist which lists all the information you should have before you decide to purchase a business. As you get information, simply check the entry, and move on. Once you’ve got the checklist filled out, you can buy the business with confidence, knowing that you have done all the necessary research. But, what should be on this checklist? Here is an easy to follow checklist that you should reference when you are looking to buy a business.
Before actually looking at businesses, you want to get a clear idea of what type of business you are looking for and what resources you have at your disposal. So, before you go searching around for a business for sale, check off the following:
Formulate a clear idea about what types of businesses you would be interested in running.
If you have anyone who is going to be helping you run the business (a spouse, or a relative), reaffirm once more that they are willing and able to put in the effort.
If you’re planning on using a broker to aid in finding a business, make sure you find a broker that you trust and preferably one that has expertise in the area of business you want to get into.
Start by gathering the following information about the business before you move on to getting more in-depth records and information from the business owner:
Get a brief history of the business, with special attention paid to any major events in the history of the business, such as changes in ownership, major downturns, major upswings, etc.
Get the owner to give you a description of the how business actually works, how many employees work at the business, and how the business operates on a day-to-day basis.
Find out from the owner exactly why they are choosing to sell their business.
Get information about the employees and whether most of them are willing to stay on despite the change in ownership.
Find out if the business requires any sort of special license to operate. If it does, determine how difficult the license is to obtain and if it costly to get the license.
Do a check on all the relevant laws around the business, and make sure the business is committing any flagrant violations; make sure you won’t be hit fines a few months after purchasing the business.
Once you gather basic information on how the business actually functions, how many people actually work there, and how the business has evolved over time, you can move onto more important information about the actual financial side of the business.
With this part of the checklist, you are trying to gather as much information as you can to see if the business will give you a good return on your investment. You want to try and find information about how the business makes most of its revenue, how much the business is really worth, etc. So, make sure to get the following information:
Get detailed income records, tax returns, balance sheets, and financial forecasts.
Get a detailed breakdown of how much the business is worth. You don’t want to necessarily take the business owner’s valuation at face value. Instead, you should seek to either do your own valuation based on the financial records you are given or seek help from a professional valuation firm.
Get a breakdown of the asking price. Find out how much the owner values the various parts of his business at, and then compare that price to their real market value.
Determine whether the business is going to need an injection of capital in order to continue operating, or whether it can operate on its own.
Find out about any debts or financial obligations the business has, and who is taking on responsibility for those debts and obligations.
Now you will want to start evaluating the customers of the business and its competitors. You want to find out who will be competing with you for customers and you want to evaluate how the business you’re planning on buying actually targets its customers. Gather as much of the following information as possible:
Get a good idea about the business’ primary demographic. Consider whether you want to keep targeting that particular demographic, or whether you want to try and expand the business’ appeal.
Create a comprehensive list of potential competitors. Once you have the list of competitors, start to compile a list of things that the competitors do better than the business you are buying, and what you can do to compete with these other businesses for sale.
Finally, you are going to want to look past the business and research the broader industry that the business is a part of. You don’t want to buy a business, only to find out that the industry is actually on its last legs. So, researching this information:
Get a comprehensive understanding of the industry, determine whether the industry is on the rise, or whether it is going to experience a massive downturn in the near future.
Find out about emerging trends within the industry and determine whether they will have a significant impact on the way your business operates.
Once you have completed the checklist, you can start beginning the process of actually purchasing the business. Of course, this checklist isn’t mean to be a list of every question you need to ask. It is very likely that as you look over documents and do more research, you are going to come up with other questions that need to be answered. None the less, this checklist should serve as a good place to start.