Purchasing an already existing business comes with many benefits for an entrepreneur. It can be a fantastic opportunity in some instances or a possible hassle down the road if the proper due diligence is not done. Before signing agreements and moving forward in your new venture, taking the time to investigate, answer any “must-know” questions, and seek out financial, legal, and company answers can pave the road to a successful business.
There is no such thing as asking too many questions before purchasing a company. If anything, the more information you look into and gather, the better off you will be when your name is tied to the business. The path to buying a business may be a long one, but there are some crucial factors of due diligence that are a “must-know” before opening the doors.
Do You Know The Past Financials?
The first step in buying a business is to look into the business’s financials over the last one to five years. This can give you a clear picture of possible red flags in the business or changes you will need to make in the future.
Documents such as current bank statements, tax returns over the last five years, profit and loss statements, accounts payable and receivable, and possible debts within the business are the most important to collect. This will show you what is working, what isn’t working, and if there are debts that you will either need to take on or try to seize from third parties.
Have You Read the Lease?
Understanding the lease before going into the business front may not be one of the most crucial first steps when looking into a business; however, it can change how you may run or where you run the business as a whole.
When obtaining the lease, you want to go over when the lease is up, what renewing the lease looks like for you and the landlord, and if it is okay for you to continue to run the business in that space. By speaking with the landlord, you can also look at how the past business owner was paying rent and ensure they were not close to eviction.
Do You Know the Quality of Physical Assets?
Depending on the business you are buying, it may come with certain assets such as machinery, vehicles, or other equipment. A vital part of due diligence is to ensure that these assets are in good condition and in working order when you take the title of the owner.
On top of any equipment, physical assets can also include inventory. Before buying the business, you will want to look over any current inventory and see if any of it is damaged, unusable, or out of date. This can save you time, energy, and money later on.
What is the Business’s Status?
When purchasing a business, you do not want to assume the past owner was doing everything right and keeping up with the proper documentation. That is why one of the critical due diligence steps, and a “must-know” before buying a business, is to check on the necessary permits and licenses. Depending on the company, there are specific requirements to keep the company legally running in the eyes of federal and state laws. If those permits and licenses are not there, you may need to obtain them yourself.
If the business is on a property, you will also need to check for any zoning and environmental regulations. This can show you if that type of business is permitted to run on that land or if there is any hazardous material on the property itself.
Do You Know The Answers To The Legal Questions?
Many of the other due diligence steps can lead you to find possible legal issues; however, you should also be asking yourself about any other roadblocks that can come up. This can be about current commercial litigation that the business is going through, who represents the business, whether it already has business or employee insurance in place, or any other ongoing legal issues you should be concerned about. By finding these answers before taking on the business, you can better understand the business’s needs and if it continues to align with your goals.
Buying a business can be a big step in many lives, and to ensure that the process goes smoothly, it is crucial to know the ins and outs of the business before putting yourself at the forefront of the company. If you are looking to be a business owner and want assistance in answering any of these “must-know” questions, reach out to the team at Hartmann Law Office.