Expect the Unexpected When Buying a Business

After weeks to months of searching, you find the small business for sale that is right for you.  You feel it in your heart that this is your dream business.  You want to buy the business right away, making light of the due diligence process and ignoring the red flag warnings.  Remember that buying a business is a major decision.  Watch out for potential problems.  Be careful and take your time investigating the business.  Most sellers tend to sugar coat the information they offer you to make the sale.  Be cautious and skeptical to avoid making a costly mistake.

How to Avoid Unexpected “Surprises” when Buying a Small Business for Sale

  • Do a thorough financial history check.  Some business sellers may inflate the value of their business and claim unreported cash sales.  The seller may present to you only the profitable period of the business, or when the expenditures are low.  Request for tax returns and financial records for the past 3 to 5 years.  Be suspicious if the seller cannot produce them.  Uncover drastic increases or decreases in the numbers.  If the owner is lying about the company’s income, he or she may also be lying about other aspects of the business. 
  • Inquire about the reputation of the business.  Talk to people in the neighborhood.  Go to the library and check the archives for local newspapers and publications.  Is the business active and well received by the community?  Has there been bad publicity?  Go to the Better Business Bureau and find out if there are complaints about the business.  Think twice before you buy a business with a bad reputation.
  • What is the real reason that the seller is selling the business?  Verify facts about the business from locals and other businesses in the neighborhood.  Talk to those familiar with the history of the business – customers, suppliers, and realtors. 
  • Be suspicious if you feel pressured by the seller or if you are offered a discount to close the deal quickly.  The seller might be afraid that you find problems with the business.  Trust your instinct.  If you sense something is wrong, something may be wrong.  Gather more information.  Do not be pressured into acting immediately. 
  • Let an expert check the conditions of the assets, particularly the machinery.  Are there liens against any of the assets?  Who has the title to these assets? Does the real estate have a clear title?  Will there be enough inventory when you take over the business? 
  • Review all contracts with third parties.  Can you take over the seller’s right as the new owner?  Talk to the landlord.  Did the landlord have any problems with the seller or company?  Will the landlord renew the lease under a new owner?  Look out for any hidden liabilities.  The seller may face a lawsuit if he or she doesn’t disclose unrecorded liabilities.  Are there past, potential or ongoing legal problems?  Check if all taxes, particularly the sales taxes, are correctly reported and fully paid.  You as the new business owner will inherit any outstanding sales taxes due.  Does the company offer warranties or guarantees to its customers?
  • Make sure there are no hidden employment agreements, claims, or unpaid employee benefits.  Who are the unproductive and performing employees?  Some employees may decide to quit once the business changes hands.  Others may be loyal to the old owner and act differently toward the new owner.
  • How many times has the business changed ownership?  Multiple owners should raise a red flag.  Why did the previous owners fail? 
  • Study the demography of the business location.  Check if there are problems with zoning, toxic waste, noise and environment laws.  Are there planned changes in the vicinity that will affect the business?
  • Check with product or raw material vendors if they will continue to supply the company with its needs.  Negotiate for a good price. 

There is no such thing as a perfect business for sale.  All businesses have problems that are best resolved before closing the deal.  Retain experts to minimize running into financial, legal and contractual risks.  Do not be shy about asking for all the information and documents you need.  If the seller refuses to supply them, or if he or she gives you the wrong information, it is time to look elsewhere for the right business to buy.

Are these tips helpful in avoiding problems with your new company?

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