First 5 Things To Consider Before Buying A Business

If You’re Thinking Of Acquiring A Business, Start By Going Through These 5 Questions

The process of buying or acquiring a business can be a grueling and dragged out process with many false starts occurring before a deal is actually consummated.  So before you even get to an offer to purchase, or even a letter of intent, go through these five questions to determine quickly if any prospect should be ruled out before too much time and money is spent.

1.  Who’s in control of the deal on the vendor’s side?  Many times its hard to tell who’s really in charge on the vendor side of the deal.  Between brokers, and lawyers,  and accountants, and business managers, the process can get very convoluted.

While you would think that the atual owner of the business would control the deal, in many cases this is not the case due to their inexperience in the sales process.  If you can’t quickly identify and get comfortable with the decision maker, stop the process and move on.  Too many cooks will likely spoil the soup and just have you running in circles.

2. Is the Vendor Willing To Partially Finance The Deal?   Especially in business sales were there is goodwill factored into the purchase price, most third party financing will not consider the goodwill portion.  Also, vendor financing provides a quazi buyer indemnification fund, helping to assure that the vendor is completely transparent during due diligence and ownership transition.  Having a vendor loan in place is going to further motivate the seller to make sure the buyer  is going to be successful long after the transaction is completed.

3.  Is the historical financial performance of the business supported by 5 years of  at least review engagement financial statements?  Without review engagement or audited statements, you have very little if any verified financial data to go by.  There are ways around this, but its going to take more time and money to verify the accuracy of results.

4. Do your source(s) of capital support the deal being proposed?  If you are using your own cash, then you can obviously do what ever you like with it.  However, most business acquisition transactions involve third party financing, which can have restrictions on the type and structure of a deal.  Too often, purchasers think that if they can get a deal worked out that the financing will be the easy part and too often a good deal falls apart at the very end because the financing process started too late in the game.

5. Are you buying a standalone going concern business, or someone’s self employed status?  A business can be very successful, but also near 100% dependent on the owner.  If the owner has not developed systems and management and structure that can live without him, then it may be time to find another opportunity.

About the Author Brent Finlay