The advantages of acquiring an existing business are many: the business name and reputation are already established; there is an existing customer base; suppliers are already in place; the operations of the business have already been set-up and are running smoothly; and so on. Buying an existing business is a great way to avoid the headaches of starting from scratch, but don’t be fooled into thinking it’s easier. There are a lot of things to consider and investigate before you should sign on the dotted line. Having some trusted business and legal advisors, as well as risk assessment consultants, to guide you is extremely useful for making the right decision, in addition to the following checklist.
Financial and Accounting
Get a copy of the business’ financial statements and balance sheets for the last 3-5 years. If the owner of the business is not willing to give these to you, it should raise a huge red flag. As a potential buyer, you have the right to know how well or poorly that business has been performing financially.
Accounts Payable and Receivable
Take a look at the debts that the business owes and that are owed to the business. How large are they, respectively? How old are they? Are the debts clustered in a few customer or supplier accounts, and why?
Does the business have current agreements, contracts or obligations that must be honoured, such as unpaid wages, severance pay, insurance or benefit claims? What are the terms and amounts?
Is the business up-to-date with its taxes or are there any amounts owing in back taxes?
Get a list of all physical capital related to the business such as the buildings, equipment and land. Does the business own, rent or lease them? If they are rented or leased, what are the terms and amounts? If the business owns them, is it full or partial ownership? Get copies of titles, if possible. What is the condition of the physical capital? Is the equipment state-of-the-art, modern and in good condition or old or sub-standard? Get a proper valuation of all physical capital.
Get a list of any or all of the intellectual property that the business may own or lease. Make sure that there are no outstanding counter-claims against any intellectual property, either by employees or others.
Get an up-to-date inventory list and match it up with the physical inventory. Is the inventory made up of current stock or old, un-sellable stock? Is there enough stock available to tide you over, or will you have to place a massive order once you take over? Is the valuation of the inventory a fair one?
Workplace and Personnel
Management and Key Employees
Get a copy of all employee contracts and benefits, as well as their job descriptions. Talk with them and find out if they would be willing to stay on under a new owner. This is also your chance to find out aspects of the business that the present owner may be hiding from you or is unaware about.
Have a workplace safety audit done. This is especially important if you are considering purchasing an industrial business! You don’t want to be caught in a safety violation unawares.
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