22 Things to Consider
There are a lot of things you should consider when buying a business. This is a list of items you need to evaluate, in order to check the value of a business before making a purchase decision.
It refers to all products and materials inventoried to be resold or used in services. Important: You or a qualified representative should be present during any stock review. You should know the status of the inventory, what exists in present, and what existed at the end of the last fiscal year and the previous one. You should also have the inventory evaluated. After all, this is an important asset and you need to know its true value. Also, check your inventory for vendibility. How old is it? What is the quality? What is the condition? Keep in mind that you do not have to accept the value of this inventory; it is subject to negotiation. If you feel that it is not consistent with what you want to sell or that it is not compatible with your target, then mention these points during negotiations.
2. Furniture, equipment, and building
These include all products, office equipment, and business goods. Get a list from the seller that includes the name and model of each piece of equipment. Then, determine its current status, the market value at the time of the purchase vs. the current one, and whether the equipment was bought or leased. Find out how much the seller invested for improvement and maintenance, in order to keep the equipment in good condition. Determine what changes you’ll need to make for the building to suit your needs.
3. Copies of all legal contracts and documents
Contracts include all rental and purchase agreements, distribution agreements, subcontracting agreements, sales contracts, trade agreements, labor contracts, and any other tools used for the legal operation of the business. Also, evaluate any other legal documents, such as fictitious business name statements, constitutive acts, registered trademarks, copyright, patents, etc.. If you are considering a business with valuable intellectual property, hire a lawyer to evaluate it. In the case of a real estate rental agreement, you need to know whether it is transferable, the duration of the contract, its terms, and whether the owner has to give permission to transfer the lease.
4. Tax declarations for the last three years
Many small business owners use the business for personal needs. They buy products destined for their personal use and then register them as company expenses. You need to use your intuition and your accountant’s analytical skills to determine the company’s current financial value.
5. Financial statements for the last three years
Evaluate all financial statements, including books and financial records and compare them with tax returns. This is especially important for determining the profitability of the business. Sales and operating reports should be reviewed with the help of an accountant familiar with the type of activity you are considering.
6. Sales registers
Although sales will be recorded in the financial statements, you should also evaluate the monthly sales records for the past 36 months or more. If more types of products are available, separate sales by categories, as well as by payment method, i.e. cash and sales credit. This is a valuable indicator of the business’ current activity and provides an understanding of potential business cycles.
7. The complete list of obligations
Consult a lawyer and an accountant to review the list of debts and determine the possible costs and legal ramifications. Find out if the owner has used assets such as equity equipment or debt accounts as collateral to secure short-term credits, if there is a right to asset retention by creditors, processes, or other claims.
8. Total accounts receivable
Separate them for 30 days, 60 days, 90 days and more. Verifying the age of the claims is important because the longer the remaining period, the lower the value of the account. You should make a list of the first 10 accounts and check their solvency. If the customer is solvable and most outstanding accounts are longer than 60 days, a stricter credit collection policy can speed up debt collection.
9. Total accounts payable
Like accounts receivables, accounts payables should be broken down by 30 days, 60 days, and 90 days. This is important to determine how well the money is flowing into the company. For debt older than 90 days, you should check the relationship with the creditor and if he put a lien on the company’s assets.
10. Disclosure of debts
This includes all overdue notes, credits, and any other debts that the business has. Also check for investments outside the normal business area. Look at the level of credit to customers as well.
11. Categories of clients
If available, you can check the specific features of client portfolio, such as new customers, accounts closed in the past year, busiest times for current customers or which type of merchandise is the most popular.
12. Marketing strategies
How are new customers acquired? Does the company offer discounts or aggressive advertising? You should analyze the advertising history to identify the type of image projected by the business. When you look at it, imagine you are a potential customer. How does the brand make you feel? This can give you an idea of how the company is actually perceived by its market.
13. Advertising costs
Analyze your advertising costs. It is often better for a business to postpone the profit from the end of the year until the next year, spending more money on advertising in the last month of the fiscal year.
14. Price control
Evaluate current price lists and discount programs for all products, the date of the latest price increase, and the percentage of growth. You can even look at the previous price modifications to determine the best moment you can alter the prices again. Once again, use the competition as a benchmark.
15. Industry and market history
You should analyze the industry, as well as the business segments. You need to find out whether sales in the industry, as well as in the market segment, have been increasing, decreasing, or stagnant. This is very important to determine the potential for future profits.
16. Location and market area
Evaluate the location of the business and the competitors around it. A detailed analysis of the company’s location and surrounding commercial areas, including economic, demographic, and competitive prospects, should be carried out. For service companies, get a map of the business area. Find out, based on the locations of the various accounts, whether there are special requirements for delivery any shipping difficulties.
17. Business reputation
The image of the business in the eyes of customers and suppliers is extremely important. As mentioned, this image can be an advantage or disadvantage. Interview customers, suppliers, and the bank, as well as owners of other businesses in the area to determine the reputation of the business you wish to buy. Check out the existing information on the internet and in social media.
18. Seller-client relationships
You need to find out if some of the business clients are related to or have any special ties with the current business owner. How long have they been a customer? What percentage of the company’s profit is generated by this particular client? Will they still be a customer after the actual owner steps down?
19. Unjustified salaries
Some salaries may be unjustifiably high, or perhaps there are employees on the payroll that do not actually work there. All these possibilities need to be analyzed.
20. List of current employees and organizational chart
Current employees are a valuable asset, especially key personnel. Evaluate the organizational chart to understand the roles and responsibilities. You also need to analyze the company’s management practices and dive into employee salaries and duration of their work contracts. Examine any management contract as well as details of employee’s benefit plans: profit sharing; health, life, and accident insurance; holiday policies; any possible employee lawsuits against the company.
21. Health and safety requirements
Find out if the company meets all health and safety requirements and if it has been inspected by a professional. Check for clues of any suspicious activity in this regard and take into consideration the possibility that there are some unfollowed health and safety regulations that could pose a threat.
Determine what type of insurance coverage exists for the business and for all properties, as well as the company’s local representative and insurance costs. Some companies are not sufficiently insured and operate under dangerous conditions, for example in case of fire or a major incident. If you buy an underinsured business, you could lose everything in a hazardous event.