Researching
the Business
After finding a business that is for sale and that seems a
likely prospect for you to run successfully, you should spend
enough time to thoroughly investigate the business. You should
definitely get your lawyer and accountant involved in this
process, as well. By thoroughly investigating the business
(doing "due diligence," in business-speak), you
increase the chances of making a decision that is right for you.
The time spent investigating the business, the industry, and the
market will make you confident that your decision to buy (or not
to buy) was the right one.
In many cases, the seller will not give you any sensitive
information about the business unless you have signed a letter
of intent that, essentially, makes a non-binding offer for
the business, and you have also signed a confidentiality
agreement promising that you won't use the information for any
purpose other than making the decision to buy.
Keep in mind that if a business is for sale, there must be a
reason why. That reason may be because of a problem such as poor
cash-flow, bad management or a poor economy. A thorough
investigation should reveal any existing problems and enable you
to weigh those problems in your purchasing decision.
A business investigation is usually performed before the
business is bought but can continue after the sale. In such a
case, some of the sales proceeds will probably be held in escrow
until the investigation is completed, or your contract may
provide that the seller will reimburse you if certain types of
problems turn up. A business investigation involves taking a
hard, objective look at every aspect of the business. In many
instances, however, time will not permit you to investigate the
business as thoroughly as you would like. Yet certain basic
inquiries should be made. At a minimum, you should examine the
following documents:
- Organizational documents — documents that show
how the business is organized, such as partnership
agreements, articles of incorporation, and business
certificates, should be examined to determine how the
business is structured and capitalized.
- Contracts and leases — documents such as property
and machinery leases, sales contracts, or purchase contracts
should be examined to determine the exact obligations the
business is subject to.
- Financial statements — examine the financial
statements for the past three years (and longer if
available) to determine the financial condition of the
business.
- Tax returns — examine the tax returns for the
past three years (and longer if available) to determine the
profitability of the business and the whether any tax
liability is outstanding.
Below is a checklist of documents you should obtain from any
business you are thinking about buying.
- Asset list including real estate, equipment, and
intangible assets like patents, trademarks, and licenses
- Real and personal property documents (e.g., deeds, leases,
appraisals, mortgages, loans, insurance policies)
- Bank account list
- Financial statements for the last three to five years
- Tax returns for as many years as possible
- Customer list
- Sales records
- Supplier/purchaser list
- Contracts that the business is a party to
- Advertisements, sales brochures, product packaging and
enclosures, and any other marketing materials
- Inventory receipts (also take a look at the inventory
itself, to check the amount and condition)
- Organizational charts and resumes of key employees
- Payroll, benefits, and employee pension or profit-sharing
plan information
- Certificates issued by federal, state, or local agencies
(e.g., certificate of existence, certificate of authority to
transact business, liquor license)
- Certificates, registration articles, and any amendments
filed with any federal, state, or local agency (e.g.,
articles of incorporation for a corporation, articles of
organization for a limited liability company)
- Organizational documents (e.g., corporate bylaws,
partnership agreements, operating agreements for limited
liability companies)
- List of owners, if more than one (e.g. all shareholders if
a corporation, all partners if a partnership, all members if
a limited liability company)
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