Business transfer? What you should know before you buy a business

Business transfer? What you should know before you buy a business

Getting into an already positioned and working business is very comfortable. You’ll be receiving a client base that already wants to buy from you, a reputation, know-how, and other pre-arranged processes that will help you skip the planning part of a company.

But not everything is as happy as it could sound. You also get employees’ vices, the big books and, if you are not careful, even the problems this particular company has. So, before you go looking for accessible small business financing, there are some things you need to research and learn about your possible new business.

The process is called due diligence and it means that you’ll do homework. You need to investigate everything there is to know about the brand, from suppliers to online reviews. You’ll need to request the current owner for financial information, payroll, and everyday operations and analyze them.

This is not uncommon, so you won’t find trouble requesting it. If the company doesn’t want to share information with you, walk away immediately. Make sure you know everything about:

Business finances

Before applying for small business financing to acquire an existing business, ask for and analyze balance sheets, tax returns, financial statements, current and past debts, credit score, accounts receivables, and accounts payable. Make sure to get visibility on everything that gives you a real idea of how the business is doing. Remember to ask for these documents for the past 5 years, this will give you a bigger picture than the last year’s results.

Take inventory

Ask for a list of assets, from computers to desks to current production, the payroll, and everything else they have and are going to include in the deal. Make sure that everything is in the state the owner is saying and have it evaluated by an expert so you’ll get an idea of the actual cost and you don’t overpay.

Mind the legality

Ask for proof that the person you are dealing with is empowered to sell the company, that the owner is the person trying to sell it, that the business is not in the middle of a legal dispute, how the lease of the physical address was dealt and every contract you need to read through to make sure everything is in order and you can understand what you’ll get and what you’ll have to renegotiate in the future.

Future finance

Companies tend to have medium and long-term contracts with suppliers, buyers, and employees. Take a hard look at the state of these contracts and what you’ll have to fulfill for said people. This way you can create your financial projections and evaluate the real worth of the company and therefore have a better idea of the king of small business loans you can afford to pay back should you ever need to apply for credit.

Accounts receivables

Ask about accounts receivables and payables to make sure who is going to receive that money or will be obliged to pay past dues. Take into account that some buyers could have already paid for the whole contract and you could be trapped into working for them without the income.

Prepaid expenses

A lease, publicity, and other yearly expenses will be a part of the deal. Either to repay this money to the owner or have him include it in the deal. Understand your obligations, terms, and services provided so you can make the most of what you already have without paying more for it.

Make sure that you both sign a Non-Disclosure Agreement so you can go into deep data of the company. Also, include your lawyer and accountant on the signature of this document so you can share the information with them and have their expertise and advice.

Always ask for advice from experts so you don’t end up not knowing something important, begin tangled in legal problems that you didn’t detect, or having overpaid for something that maybe wasn’t all that worth it. Are you ready to start your due diligence?

John Norwood
John Norwood is best known as a technology journalist, currently at Ziddu where he focuses on tech startups, companies, and products.