Buyer’s Market…Buyer Beware
I am enthusiastically in favor of entrepreneurship. And, now is a great time to buy into an existing business.
So, how do you take advantage of the buying opportunities and avoid the pitfalls? Well, the answer is document, document, document. Get the right documents, read the documents, and question the documents.
Here is the “short list” of documents that are essential in looking at a potential purchase:
1. Corporate/organizational papers. Get the charter, the organizational certificate, the membership agreements, the stock ledger book with all transfers noted and the minute book of board meetings and corporate decisions. Ask if there are any copyrights, patents, trademarks or other intellectual property documents. Get copies of those too.
2. Financial Statements. Do not buy a business based solely on a redacted version of the financial statements. Get the most current “Interim” statements as well as the year-end statements for the past 5 years, if available. Have the owner and or the CFO sign the statements as to their accuracy.
3. Accounts Payable and Accounts Receivable lists. These should be system generated. If not, why not? If Payables are greater than Receivables, you need a good explanation. Check the credit of any account that represents 15% or more of the total Accounts Receivable. Check the aging of the accounts. If over 60 days old, find out why. Verify, verify, verify.
4. Check liens against the company. You can usually do this with the Secretary of State in the state in which the company is organized. You should also check liens in the state, in which they reside, are headquartered or do most of their business. Run a commercial credit report on the company for good measure.
5. Tax Returns and proof of payment of state and federal taxes for the past 5 years.
6. Licenses both state and federal along with any OSHA inspection requirements. If real estate is being sold along with the business, you have all the Phase One and soil contamination inspections to do. If you don’t know what is required, hire an advisor who will walk you through this part. You cannot afford to buy into a license or inspection problem.
7. Proof of insurance. Basic business liability insurance is essential but there is the matter of professional liability, health insurance, workers compensation, property, product liability, etc. Ask the seller for an organized spreadsheet of the carriers, contact numbers, agents, amount of coverage, and policy periods. Then get copies of the actual policies.
8. All contracts signed by a representative of the company. This will include leases both real estate and equipment, supplier agreements, sales contracts, employment agreements including union contracts, purchase orders, and purchase agreements.
9. Current organizational chart with names as well as positions. Along with this you will want to see a payroll. How often and how much are the employees paid? If a payroll service is used, these reports should be readily available.
10. Detailed Inventory list. If the company maintains inventory, there should be a readily available inventory list reflecting the age of the inventory as well as quantity and value.
But there is more to evaluating a possible purchase than these documents alone. There are policies, management strategies, markets, marketing strategies, locations, reputations, customer loyalty, pricing strategies, quality controls, business cycles, seasonal sales patterns, and possible product obsolescence. All these and more must be reviewed, analyzed, and evaluated.
Even so, do not be afraid to step out and consider the possible purchase of a going concern. Many seasoned entrepreneurs who want to retire will consider training the right buyer and even consider helping with the financing of the purchase.
We can help, too. Give us a call.
Brenda
