Buying a Business? Here Are Three Essential Things to Look Out For
The following are just a few crucial factors to keep in mind during any business purchase.
Ensure You're Buying a Business That's Financially SoundNot all that glimmers is gold. No matter how promising or successful a business may appear, you must confirm that it is in good financial standing across the board. Examine the financial and cash flow statements, balance sheets and tax documents going back at least three to five years. Look for the amount of money the business has in accounts receivable versus accounts payable, how much bad debt it has written off, and whether there are any outstanding loans, liens, or tax bills. Not only do you want to ensure that your new business is healthy, but you want to avoid inheriting legal and financial liabilities that will become your burden to bear once you own the business. Be wary of any seller that is not forthcoming with this information or who claims not to have it available. That is a big red flag.
Buying a Business Shouldn't Include Buying its Legal ProblemsJust as important as the financial state of the business are the legal issues that currently or potentially impact your newly acquired enterprise. Is the business you are buying presently in the midst of a lawsuit, or about to be? Is it current on all tax obligations and compliances with local, state, and federal agencies? Does it have adequate insurance coverage? Many of these liabilities will come with the business you purchased if they are not resolved first. You may also want to consider the state of the business' intellectual property - such as its logo, slogan, brand name, etc. - and whether you wish to acquire these as well. Most firms should have an employee manual or company policy that you should examine closely to better understand the business.
Employment IssuesIn addition to purchasing the business, you may continue to employ all or some of its employee. Needless to say, you want to make sure your new personnel will be a good fit for your new venture. Investigate the rate of turnover and whether employees seem professional and motivated, as this can tell you a lot about the quality of the business you wish to acquire. It can also give you some insight as to any potential issues with the business and/or with the owner you are purchasing it from. Make sure there are no current or pending disputes or litigation involving employees, which may foretell future problems for you. It also never hurts to familiarize yourself with your new staff.