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Buying a business has been characterized as risky.  However, if you do your due diligence, you will reduce the risk into an opportunity.  I advocate buying a business when you want to grow more quickly and especially when there are assets that will enhance the total operation.

Before you buy a business, consider these factors:

1. How happy is the client base? – The best reason to buy a business is to expand your client base.  Evaluate the client base independent of the seller’s input and determine how you can increase sales to the existing client base.
2. Is the market for this product/service growing? – Stay away from declining markets, products or services.  Frequently, owners sell about the time these have peaked.  You do not want to inherit their future problems.
3. What is the brand promise?  Is the company delivering on it? – The brand promise is the reason that clients keep doing business with you.  If the company delivers on the brand promise, clients will keep coming back.  If not, the business is not a good buy.
4. What is the quality of the management team? – Most investors say that they based 65% of their decision to buy a company on the quality of the management team.  You can significantly enhance your business if the managers lead and manage well, which can be difficult to find in entrepreneurial companies.  
5. Who are the key players?  Are they happy?  Are there succession plans in place?  A key player is someone who has significant knowledge that enhances the company.  You want to be sure these people stay with the company.  For example, a software designer who ‘invented the program’ is key and needs to stay.  You also want to be sure that the company makes plans to fill in that knowledge so that you do not become overly dependent upon one person.  Sometimes key players are also managers, not always.
6. Are the employees happy?  Most entrepreneurs agree that employees will be the opportunity and the problem in your business.  Unhappy employees turn around slowly, which could make your acquisition more difficult.  Consider interviewing employees on your own or using a human resources consultant to sort this out.
7. Has the valuation of the business increased every year?  What can you do to grow it more?  A steady increase in valuation will drive further success for you.  If valuation has been declining, you need to know why.
8. How does the company manage and measure performance at the company level? Functional level?  Individual level?  The more numbers/metrics to measure in a company the better it will function.  Whatever is measured will improve.
9. Why is the business being sold?  Many owners make ‘dog’ companies look great right (three years) before they sell them.  Buyer beware.
10. What is the quality of the tangible assets?  Look at the inventory list of assets and walk through the facilities to ensure they are all present.  Have they been maintained?  You do not want major expenditures to update assets.
11. What is the reputation?  Will your reputation improve as a result of buying the business?  Ask the local business editors for their take on the reputation…it will generally be very objective.
12. Are the financials up-to-date? Taxes paid? Debts itemized with appropriate documentation?  Shareholder agreements in place and reviewed?  The more files of financial data, the better.  Check everything.  I recommend that you hire a CPA to do financial due diligence.  You want to tie out every account on the balance sheet and profit/loss statement to supporting documentation.