Over the last two articles we have looked at:

What Due Diligence Is

A highly detailed look at the business you are considering to buy

Who Carries Out The Due Diligence

You, your attorney/lawyer and/or your accountant

What To Look For In Financial Information

A whole lot of things that you need to know and will have to follow the link above to read!

We still have some important areas to consider before we can say you have completed your due diligence, diligently. You try saying that after a few glasses of wine!

Assets – What To Look For

Assets of a business vary business to business but the due diligence involved will be very similar regardless.

What is important about assets is knowing what will be included in the sale and that they are all in working order.

A list of the assets is a must and if at all possible, you should also get a depreciation schedule and any warranty information for each item.

Beyond that you are checking for clear legal ownership, primarily that all required documentation is present and correct.

Inventory – What To Look For

Inventory is normally an additional cost of purchasing the business beyond the asking price and is valued at the time of sale.

However, you do need to know what inventory the business normally stocks and sells in a given period of time as this can affect your cash flow projections amongst other things.

You are looking for ‘white elephants’ masquerading as inventory, items that are not selling and haven’t been for a very long time. You won’t want them included when it comes to agreeing the final inventory valuation.

General Operations – What To Look For

Every business has its own way of doing things. Taxi services have to maintain the vehicles, Hotels have to launder their dirty linen, and Florists have to buy in their flowers.

Nearly all businesses have staff but how do they control and monitor them? What training is provided, what staff benefits, uniforms? You need to know all this before you take over or maybe, just maybe, somebody might try and pull a fast one on you.

They all have finances to look after. How do they track the cash? What checking or auditing systems do they have in place? You want to know this up front not trying to play catch once you are running the business yourself.

Banking is another area where you need to know the operational systems being used. Do their systems work? Can you improve on them?

Make sure that you are aware of and have checked all of the legal documents such as licenses, proof of incorporation and a list of all of the owners.

Are there any local legal requirements that you need to be aware of? This one is for your attorney or lawyer to check out.

Sales & Marketing – What To Look For

You want to know how the business gets its customers or clients. Again your looking to not only understand their current methods but look to see if you can improve on them.

Take particular note of any ‘stars’ amongst the sales team that appear to be the driving force behind the sales results. Lose that star and what is the business worth now?

The New Team

Employees – What To Look For

Assuming that there are employees, you want to know as much about them as you can.

How long have they been with there, how well trained and motivated are they, how important to the performance of the business are they?

Have there been any disciplinary issues, how happy do the staff look?

Beware of the ‘star’ liability outlined above. Lose the star and what affect does that have on the business?

Be aware of the sensitivity of letting current staff know the boss is trying to sell the business. As in don’t let them know!

Vendors/Suppliers – What To Look For

No matter what the industry, all businesses have suppliers of some description. Even service industries.

These could be suppliers of products being sold, spare parts, machinery, equipment, office supplies, repairs/maintenance, insurance, etc.

Make sure you have a thorough and comprehensive list of all suppliers. You need to know about any current contracts or commitments, credit agreements, licenses, special discounts or deals.

If you do get permission to speak to suppliers, ask them about their relationship with the business you are about to purchase.

Competition – What To Look For

It might come as a shock to you but the seller is not going to be your best source of information on the competition!

You need to know the main competition for yourself and determine if they are truly a threat or just another small fish in a vast lake with very little chance of taking business away from you.

Look for how your business-to-be compares on all the important issues. Price, service, value for money, quality and USP.

What’s USP I hear you ask? It stands for Unique Selling Point and is the reason why a potential customer should buy from you rather than anyone else. Do your competition have any USPs that you can learn from? What is your USP?

Learning for your competition is an ongoing thing. You should be constantly evaluating what is happening in your market, in your neighborhood and looking for new opportunities to exploit and new threats to defend against.

What’s Next?

Wow that was a lot of work!

But wasn’t it worth it? Now you can look forward with confidence to completing the purchase of your new business. Knowing that you have all the bases covered, all the i’s dotted and all the t’s crossed is going to make you feel a whole lot better.

Now you move on to finalizing the sales agreement, known as “going to contract”. Any issues important enough to warrant inclusion in the final agreement are added and agreed with the seller.

It is not unusual for you, the buyer, to try and use some of the information that you have accumulated in this exhaustive due diligence phase, to barter the purchase price down.

But finally it’s all over. You have your new business and the exciting adventure is just about to begin.

Welcome to the world of the entrepreneur, the world of business and commerce.

Enjoy.

This article was written by Brian K Fitzgibbon CPA.

Brian is an experienced accountant and small business consultant. He runs his own business, lectures extensively on small business topics and has checked out and valued many hundreds of small businesses for buyers.

Brian is also the author of the highly acclaimed and invaluable
"How To Value A Business And Buy It Without Fear"
A do-it-yourself guide for first-time and experienced buyers alike.

To download a FREE Chapter from Brian's book please follow this link: "HowToValueBusiness.com"

May 22nd, 2009 | Tags: buy a business, buying a business tips, due diligence | Category: articles | Subscribe to comments | Leave a comment | Trackback URL  |