Due Diligence Tips for Buyers
The following is a list of 8 items to consider when performing Due Diligence while considering a business purchase. This list is not a comprehensive list as each transaction lends itself to a unique set of circumstances and considerations, but it provides good things to consider when purchasing a business.
1. Business Name, Owners, and Licenses.
Verify the business name, address, and contact numbers of the business through the State the business is operating in. Contact the regulatory agencies that govern the business and get a rating of the business and ask questions about transferring licenses. The Better Business Bureau and Angie’s List are good resources to review customer complaints as it the internet. 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 check the status of their licenses with the State. Corporations, partnerships and sole proprietorships have public information available from State. 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.
Get a complete of assets that will be purchased. This includes FF&E (furniture, fixtures, and equipment), inventory and real estate. Make sure the assets have clear titles, and the equipment has been recently inspected and are in working order. If a fleet of vehicles is being purchased, vehicle maintenance records are necessary to review how the vehicles have been maintained. Ownership of real estate assets can be verified in the county’s assessor’s office and motor vehicles with the Department of Motor Vehicles. Ownership will need to be transferred at closing.
3. Liabilities and leases.
Have the Seller provide a list of the liabilities that will be assumed (if any) and the leases that will be transferred to your name. Get a copy of the lease obtained from the landlord(s) and any other lease that may be pertinent to the transaction. Review the leases. If necessary have an attorney review the leases. You will need to know what these leases are, how much the monthly obligations are, the rules and restrictions of the leases, expiration dates, delinquent payments, and past due amounts owed for these leases.
4. 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 statements, payroll and sales files, employee files, equipment maintenance documents and other important data. Hiring a CPA to review the documents is a good idea as well. Remember that CPA’s are good at auditing records and preparing tax returns, so use them for that. Have them check for accuracy and inconsistency. I wouldn’t recommend using them for business advice though. I have had CPA’s try to talk their clients out of buying a good business when the client went on to make millions because he/she chose to ignore their business advice.
5. Reputation of the Company and Business Relationships.
Talk to the landlord, 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.
6. 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.
7. Legal Issues
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.
Talk to the owner about his insurance coverage. You will also need to talk to your insurance agent about coverage you will need for the business. Insurance experts can give you guidance about the types of liability coverage needed, but also have ideas about things like malpractice, umbrella coverage, errors and omissions, general business insurance, property and casualty coverage and limits, etc. You will need to make sure you have insurance in place the day of closing as well.
Rick brings a unique blend of sales, entrepreneurial, and financial experience to Business Sales Group. He began his career as a CPA, working in Nevada and Utah where valuable financial experience was gained. He uses those skills every day. He graduated with a Master’s of Science Degree and Bachelor’s Degree from Utah State University. As a business owner he started Liberty Mortgage, a mortgage bank licensed in 23 states nationwide. He eventually sold the successful company to an investor from California. He has been in the M&A space helping people sell their businesses since July, 2010. During his first year as a business broker with BRC, he listed and sold more businesses than the entire office combined.
As a sale-side advisor for Mergers and Acquisitions transactions he brings a unique blend of financial, advisory, accounting, and management skills to the table helping sellers maneuver the intricate details of the deal through closing.