What To Look For When Purchasing a Business For Sale.
For some, due diligence may be the least understood part of the business acquisition process. When looking for a new business to buy, you should comprehensively understand the inner-workings of the company that you are looking to purchase. Frequently, many do it yourself purchasers have very little information about the business they are attempting to buy. Some buyers simply go with their gut feelings and romanticize the day they will finally own their own business. This leaves many buyers unprepared to face the very real challenges they may encounter in the early stages of operating a business.
As you preform due diligence, you engage in an investigative process by which both buyer and seller should request information about the other to assess the viability of the target company. This enables the buyer to make an informed, rational decision about the acquisition. The most important aspects to consider during due diligence process are the financial books and records kept for the company. You should be able to follow the flow of funds to see the income, cash flow, overhead and expenses of the business as it currently operates. Many people simply are not familiar with the process to properly assess a company’s financial records. This may be a great time to utilize the services of an accountant or other tax professional. In addition to your business broker, they can properly advise you on the financial stability of the company before you complete the transaction.
Many people simply are not familiar with the process to properly assess a company’s financial records.
Any accounts receivable.
Cash, cash accounts and other banking documents.
Contracts held within the company.
Inventory on hand.
Equipment and supplies.
Website and social media accounts.
Intellectual property rights.
Patents, trademarks, logos, or any other assets.
Another area to focus your due diligence on are any government licenses, permits or other rights granted by any governing agencies. Generally, in the sale of a business the license will transfer over to the buyer as a person-to-person transfer. Once an offer is accepted, the buyer and seller will open an escrow account and the escrow company will file a notice of intent to transfer with the governing agency. These transfers can take months to complete and your business broker should work with you in this regard so you know exactly what to expect. This process will vary greatly in time and difficulty, depending on the type of business you are looking to purchase and the local laws applicable in the merger or acquisition.
- Employee or independent contractor agreements currently in use
- Non-disclosure on non-compete agreements
- Wage reports including audits and labor dispute agreements
- Government documentation required for employers on its employees
Remember, in most cases the seller tax liability for the sale.
In most business sales, the seller assumes responsibility for any taxes which are payable in connection with sale of the business assets. Make sure that taxes are prorated to the date of closing with respect to the real estate sale. In this process the buyer may ask the seller for appropriate tax documents including:
- Prior year federal and state tax returns
- Reports listing any tax arrearages or disputes
- Documents on the occurrence & outcome of prior tax auditing
Reports listing any tax liens of real property or assets
The buyer should be put in a position at closing to be in complete and actual possession and ownership of the assets, free from all liens for the business that is being acquired. The deed for the real estate, bill of sale for the equipment, assets and inventory shall be provided by the seller for the buyer. The assignment of contracts, leases, patents, trademarks and copyrights shall also be assigned to the buyer from the seller. Any government licenses, including certificates of occupancy, motor vehicle titles, licenses, tariffs and any other approvals or applications required by applicable governing agencies should be transferred to the buyer.
In addition to the seller’s responsibilities the buyer also has some responsibilities of their own in order to complete the business sale transaction. The payment for the purchase of the business is clearly the most important one, but there are a lot of other things that should be looked into here. The buyer should present all legal qualifications and authorizations from the applicable governing bodies. A corporate resolution authorizing the buyer to purchase the business assets should also be provided. The buyer should be responsible for all inspection results on the property being sold to guarantee financing and provide reasonable assurance of proper financing for the acquisition of the business. The buyer should also be responsible for environmental reporting on the property to ensure it meets federal, state and local guidelines regarding potential regulations.
Use A Broker
All of these should help you preform the necessary due diligence when looking to purchase a business for sale. Remember it is extremely helpful to use a licensed business broker when looking to perform a business acquisition.
Shawn Davis and his team at LINK Business are always looking out for your best interests whether purchasing or selling a business. So if you need help with any of these items, please don’t hesitate to give our team a call: