Q: I am considering the purchase of a business. What information should I ask for from the current owner?
A: What you are asking is commonly referred to as doing your “Due Diligence.” Or, to put it another way, look before you leap into a situation that could backfire and cost you a lot of money and heartache.
The process should start a minimum of three months prior to the sale and commence once you and the seller have signed a letter of intent and non-disclosure agreement. The seller then agrees to provide you with business data including tax returns, financial statements, personnel records, customer information, and an inventory of all physical assets.
You should hire an attorney and accountant familiar with mergers and acquisitions to help you with the due diligence process. Pay particular attention to the following:
- Legal – Are there any pending legal proceedings against the seller? Have you sought advice on the best way to structure and finance the purchase?
- Taxes – Are you purchasing assets or will it be a stock sale? Are you aware of relevant IRS provisions of capital gains treatment as it relates to each?
- Assets – Do you know what you are buying? What is the market value versus the book value, and what is the condition and replacement value of expensive machinery & equipment? Are accounts receivables current (i.e. not more than 30 days old)?
- Expenses – Do you understand monthly cash flow? Historically, is the business generating enough monthly income to cover operating expenses and produce a profit? Have you included interest you will incur to finance the purchase?
- Debts – Are the assets you are buying free of debts and liens?
- Staff – Are there any contracts in place with staff and are salaries in line with those of your competitors? Is employee morale high?
- The Seller - What is their reason for selling the business? Are they willing to sign a non-compete agreement? Are they willing to stay on for a period of time to ensure an orderly transition?
- Purchase Price – Whether it is an asset or stock sale, the price should be determined by an independent appraisal. Both buyer and seller secure their own and then negotiate any differences requiring discussion.
This is intended only as a basic guide and you should rely heavily on the advice received from your attorney and financial tax accountant before making any final commitment.
Gray Poehler is a volunteer with the Naples Chapter of SCORE. To learn more about management issues facing your small business, contact SCORE Naples. Counseling is provided FREE of charge to all U.S. citizens and legal aliens. To register call 239-430-0081 or visit our web site http://naples.score.org/mentors . A counselor will contact you within 48 hours. Please include your name, email address and a contact phone number.