subject: Be Diligent - Buying A Business With Your Eyes Open! [print this page] You wouldn't expect to buy a car without first checking it out, would you? You would need to know if the transmission made any whiny noises, the gears crunched when they were engaged or if it over-heated badly when stopped in traffic. When you buy a vehicle, it's commonly referred to as one of your "big ticket" purchases and something that requires quite a bit of thought and application. It goes without saying, therefore, that you should "look underneath the hood," whenever you're thinking of buying a business from somebody else. The creation of a due diligence checklist is critically important, as this is where any hype associated with the sale of the business is revealed and hard facts are established to either corroborate or overturn the claims of the seller.
We drew an analogy with a car purchase. The major difference here, of course, is that the car is a mechanical object. When assessing the value of the car, what you see is what you get to a certain extent and any otherwise "hidden" elements can be revealed, with the assistance of a qualified auto shop mechanic if needed. A business represents a very dynamic purchase, as its makeup is frequently difficult to quantify and qualify. Often, a business relies heavily on goodwill and reputation and its value has been built up over a period of time. As the business is so difficult to value and many of the claims of the owner may well be subjective, your due diligence checklist should take on additional importance.
You will often be required to put some kind of financial consideration into escrow before you will be able to gain access to some of the more confidential facts and figures associated with the business for sale. Whenever you are requested to do so, always ensure that you have an accompanying agreement, couched in language to protect you. You should specifically note, that if you find information that causes you to change your mind, you will have the right to the refund of the deposit. Normally such clauses are accompanied by a specific time frame, during which time you will have the opportunity to inspect the assets and records.
People often assume that the most important records are the financial statements. While these documents are, of course, fundamental to the viability of the operation, you need to immerse yourself completely in the business in question and look laterally at the industry around you. While you will not have access to hard data from your competitors, take a good look at their operations and make certain assumptions by reading between the lines. Look at the contracts in force with prime vendors and other contractors, essential to the operation of the business. How strong are these agreements, are they portable and can you see opportunities for improvement or, conversely, major issues ahead?
As you process your due diligence checklist, you should be able to gauge how the outgoing seller has marketed the business and take a view of how effective such marketing has been. This will give you an idea of the potential, or lack thereof, should you decide to take the reins!
by: Richard K Parker
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