How to Investigate a Business for Sale
Before deciding to buy a business, do your homework. Your investigation must begin after drawing up a shortlist of potential businesses to buy. Use the Internet and social media to learn about each business prospect. Pose the following questions to people involved in the same business:
- Why is the owner selling the business?
- What is the reputation of the business?
- What is the future outlook?
- Does the company have a sizable market share to remain profitable?
With some perseverance, follow each information trail, taking notes as you go. After a preliminary exploration, some businesses may reveal negative reviews. This narrows down your choice to one. It is only then, when you think the company will stand up to a deeper investigation, that you meet the owner of the business. Start the due diligence process with the goal of making sure the company is worth buying.
Here is a checklist for investigating a business for sale:
1. Business Name, Owners, and Licenses
Verify the business name, address, and contact numbers of the business through the Better Business Bureau. Are there complaints against the company? You can check with the Securities & Exchange Commission if the company is publicly listed. Find out who the business owners are. Search for published articles about the company and its owners or principals on the Internet and in local newspapers. If the principals or key employees are required to have professional licenses, you can verify the status of their licenses with the Department of Business and Professional Regulation. Corporations, partnerships and sole proprietorships are public records available from state repositories in the state’s capitol. A corporation is assigned a FEIN or Federal Employer Identification Number that can easily be traced. You can find out if the company is active and current in filing its yearly documents as required by law. Check with the issuing licensing agency if the licenses and permits are valid and up to date.
2. Assets
Make sure the assets have clear titles, and the equipment have been recently inspected and are in working order. Ownership of real estate assets can be verified in the county’s assessor’s office and motor vehicles with the Department of Motor Vehicles.
3. Financial Documents
It is recommended that you review 3 to 5 years of financial history to have an idea of the overall performance of the company. Study the profit and loss statements, balance sheets, accounts receivable, accounts payable, tax returns, vendor invoices, bank records, payroll and sales files, employee files, equipment maintenance records and other important data.
4. Reputation of the Company and Business Relationships
Talk to the landlord, creditors, vendors, neighbors and customers to find out if the company has positive dealings with them. Find out if they have complaints, particularly if the business pays its obligations. What is the reputation of the business in the community and industry? The local Chamber of Commerce and industry or trade associations are great sources of information.
5. Location of Premises
Examine potential threats to the business from competitors, especially those in the vicinity. Go to the city’s planning department to find out if there will be future road or building construction that may decrease foot and vehicle traffic, or if a large competitor is planning to build near the area. Check also with the environment office if there are existing or new regulations that may affect the business.
6. Legal Issues – Litigation, Bankruptcies, Liens, Judgments, and Criminal Records
County courts have records pertaining to judgments, liens against the business owners and tax liens. State records have the UCC (Uniform Commercial Code) filings that contain financial information. It is important to check if the principals have criminal records. You can find out from court records and from the Department of Corrections.
There are many records that can be accessed for free online, or through agencies and information providers for a fee. Engaging the services of a business appraiser, lawyer, broker and accountant is necessary when investigating a business. They will help in sourcing and interpreting the information you need in making the decision to buy a business.
Are these tips helpful for your due diligence?
