The Buyer Checklist. What Every Buyer Needs to Know Before Buying a Business.

Author: Desiree Wilson - LINK San Diego

Being an entrepreneur is one the most rewarding life choices. Going out and creating a brand new start-up can be a courageous undertaking that not everyone wishes to do on a first attempt.  Acquiring a business with proven success may be less risky to a new business owner.  When deciding to buy an already existing business, there are some essential items to note for a successful transaction.

First, you want to have proper representation.  While DIY (Do It Yourself) is all the rave now, you do not want to attempt to purchase a business without knowledgeable advice.  There are many pitfalls in making purchases, remember the caveat emptor, "let the buyer beware."  There is a risk in everything we do in life.  Help mitigate the risk of buying a business by working with a licensed Business Broker.  A Business Broker is a business transfer agent.  By working with a professional who specializes in transitioning a business from one person to another, you gain an advocate that can assist you throughout the buying transaction and aid you with lease negotiations, coordinating the deal, and many other questions and needs that may arise during the process of buying.  Also, Business Brokers work on a fixed agreed upon amount or a commission.  Nothing is paid to the Business Broker until you complete the transaction; therefore, your interests are fully aligned, and you won't be stuck with a big bill if you decide not to purchase the business or have any unexpected expenses.  A business broker is paid from the proceeds of the completed sale and as an expense to the Seller, so you as the Buyer are in a win-win situation. 

Secondly, you want to be prepared to do your due diligence.  Due diligence may be the most underrated part of the business acquisition.  Why would you buy a business if you don't understand the inner-workings of the company?  I am regularly amazed by how little information Buyers request during the due diligence process.  Due diligence is an investigative process by which each party, Buyer, and Seller, may require information about the other or in this case the business, to assess the viability of the company enabling the buyer to make an informed decision about the purchase.  Important aspects to consider during due diligence are the books and records of the company.  You should be able to follow the flow of funds and see the income and expenses.  If you are not familiar with assessing the company financials, this is a great time to obtain the services of an accountant or other tax professionals that can advise you on the financial stability of the company before you remove contingencies and complete the transaction.  

Third, think it through before you start.  The idea is to know what you hope to achieve in buying this company.  Setting up an entity to hold your business interest is ideal.  You should do this before you begin the transaction for purchase to have the lease and sale in the name of the entity.  Making the entity formation decision sooner rather than later will prevent hold-ups in the process.  By planning your business goals before investing in the company you can approach the process with a clear mind, so you have a good idea about what type of business you desire.  Additionally, you will know your deal breakers enabling you to be decisive about which companies make sense to spend your time on and which ones you can immediately rule out.  Thinking the process through before you start is the most efficient way to use your time and have an active method.  Do you need additional funding?  If you aren't sure about the liquidity of your funds, or strength of your assets to secure the purchase and qualify for a lease, yes, I said: "qualify."  You should contact financial institutions for personal loans, home equity, or business loans so you can determine the cost of funds in your business acquisition equation.  Remember, buying a business is a risky endeavor, and you don't want to be surprised after you've spent everything by the cost of owning a business.  Insufficient capital is one of the primary reasons small businesses fail.  In addition to money, lack of experience, poor management, and inadequate credit arrangements are the other list toppers.  All of which could be prevented through proper planning and assessment before undertaking to purchase a business.  It happens all too often that I ask a prospective buyer how much working capital they have planned for after the purchase, and I get a dumbfounded look like I'm speaking a foreign language.  If you are an aspiring entrepreneur get familiar with the lingo.  It will save you from falling into the pitfall of small business ownership.

Fourth, get to know the new movers and shakers in your world.  Who are they?  Mover and shaker number one is the landlord.  Meet the landlord or the representatives working on behalf of the landlord.  These could be your most prominent advocates when you need them most or the block in your path to evolution.  For instance, if you see a space that you have a desire to build out and make your own, before buying it and signing a lease, find out if you can make your dreams a reality and have that put in writing in the lease assignment or new lease contract.  There is nothing worse than having your vision quashed by landlord limitations.  If you can't work together to be a success, you may have to take a pass on that location.  Also, you do not want to get stuck in a bad relationship that ties you up for an extended period.  Count the cost of buying this company.  Is this relationship worth it?  Can you achieve your goals within their constraints?  Do you have room to grow and express yourself in this space?  Just a few questions to answer before signing the lease.  Also, bear in mind that you need to qualify for the lease.  Having enough funds to purchase the business doesn' t mean the landlord will approve you and without the landlord approval, you cannot acquire most businesses. 

Fifth, use an escrow agent.  Take the pain out of clearing title, lien searches, tax clearances, and the like.  Let the professionals clear the air for you.  If you are buying a restaurant with a license through the Alcohol Beverage Control (ABC) you are required to use escrow, but all business transactions should encourage the use of escrow.  Remember the first step is to get good advice.  You don't know what you don't know, and the escrow process is designed to make sure you find out what you don't know, and it protects you from assuming debts, taxes, liens, and other nuisance expenses that one can unknowingly acquire during a business acquisition without adequate advice.  They are doing the heavy lifting for you, and the cost is nominal.

Use these tips to ensure that your business transaction is a success.