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Table of Contents

Web

Technology

Location

Legal

Personnel Management

Risk Management

Insurance

Business Success Tips

Sample Documents

Checklists

Contributing Authors

	Joe Kennedy Author of The Small Business Owner's Manual
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	Stephanie Chandler Author of The Business Startup Checklist & Planning Guide
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	Steven D. Strauss Author of The Small Business Bible
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	Tom Severance Author of Business Start-Up Guide
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Factors to Consider

What factors should you consider before buying a business? Here are some ideas:

PERSONAL CRITERIA:

Identify your personal goals for purchasing the business. Will the business you are considering match these goals?

Think about your expertise. What are your strengths and weaknesses? Do they complement the venture? Will your knowledge and skills be of help in operating the business?

Consider your lifestyle. Does this business fit your status and image needs?

Decide about location. Is the location convenient for you? Does it have enough traffic flow? Is the location convenient to your target customers? What is the history behind the location?

Look at the surroundings and physical conditions. Do you need to remodel? What are the estimated costs?

Consider your financial needs. How much money do you want to make? How much money will you need to purchase the business?

BUSINESS CRITERIA:

Obtain past and projected profit and sales figures. Ask for the past 3 to 5 years of audited financial statements, if they have them. Have your accountant review them.

Review the business’ operating ratios. How do they compare with industry ratios from Robert Morris Associates’ Annual Statement Studies or from Dun and Bradstreet’s Key Business Ratios? Ask the owner to explain any significant deviations.

Obtain a list of all assets and liabilities. Examine the age and condition of inventory, equipment, and other assets. Evaluate debts and other liabilities. Are there any pending legal actions? Is product liability a concern? Analyze the number, amount, and ages of the receivables. How many did they write off as uncollectible in the past three years?

Review the past 3 to 5 years’ tax returns. Obtain income tax, sales tax, and payroll tax returns. Have your accountant review them. Compare them for consistency with each other and with the financial statements. If you doubt that these are the filed returns, obtain written authorization from the seller to obtain copies directly from the taxing agency.

Obtain copies of all current contracts, including leases, loans, supplier and customer agreements, and insurance policies. Check the OSHA requirements and compliance record. Can you and do you want to take over these obligations? Review all legal issues with your attorney.

Review corporate minutes. If the entity is a corporation, obtain copies of all relevant corporate documents to review.

Determine the value and legal protection of names, logos, trademarks, patents, and copyrights that are necessary for continued business success.

Run necessary background and credit checks. Dun & Bradstreet’s credit reports, tax and lien liability searches, litigation searches, and a Better Business Bureau report are a good start.

Assess the current staff. If there are current employees, check their personnel files and interview them individually. Analyze compensation, skills, training, fringe benefits, union obligations, and turnover.

Evaluate local economic and political conditions. What are the industry trends for this business? Is the market increasing or decreasing? What is the growth potential? What is the competitive environment?

Meet with customers. Determine their level of satisfaction with the business. Talk to walk-in customers and former customers.

Deal with a cooperative seller. Will the seller be willing to assist with an orderly transition? If you don’t get along with the seller, or if the seller is reluctant to disclose all the information you request, be concerned. Don’t be afraid to walk away from the deal. There are many more opportunities out there.

Good price and good terms are essential when you finally decide to buy. Knowing the seller’s motivation is imperative for you to negotiate the best deal.

Why do people sell businesses? The reason they volunteer is often not the real underlying reason. Remember that the seller wants to paint a bright picture to obtain the best price and terms. However, people don’t generally sell businesses that are doing well, have a bright future, and are enjoyable to own and run. Your job is to determine the real reason for selling before you go too far in the transaction. It will put you in a much stronger bargaining position. Recognize that the seller has only one business to sell. You have many possible businesses you could buy, if you even do buy. You should be in the power negotiating position.