Published September 14, 2019
Question: I am looking to start a new business. Would it make more sense to consider buying an existing business? And what information should I request in the due diligence process?
Answer: Starting a business from scratch is a daunting task, fraught with uncertainty. Purchasing an established business with a proven track record eliminates many of the uncertainties.
With an existing business you eliminate the startup tasks, have a staff in place, an established customer base, and existing vendor relationships. But that doesn’t mean you shouldn’t do your due diligence prior to the purchase.
Investing in a business is no different than investing in stocks, bonds or real estate. You look at past performance, current conditions, and outlook for the future, with help and advice from professionals.
When buying a business “due diligence” refers to the process of reviewing all of the available information related to that business. The following are some, but not all, of the important issues you should consider:
- Why does the owner want to sell? Determining the answer to this question may be difficult. If the business is doing well, only poor health, the loss of key personnel, impending market downturn, or a desire to retire is a credible answer.
- How is the business doing financially? You can determine the answer to this question by requiring three years audited financial statements and tax returns. Request an aged list of accounts receivables and accounts payable to others. Also an itemized inventory list, if selling a product, and a list of all physical assets.
- Are there any pending legal issues? These could include outstanding judgments, lawsuits involving patent disputes, intellectual property, product liability or negligence resulting in bodily injury or property damage. Request copies of insurance policies to determine if the business is adequately insured?
- Are there employee turnover and morale issues? Request employee handbooks, salary & benefits information, and non-compete & confidentiality agreements. Are there any ongoing grievances?
- Customer and Vendor information. - Ask for a list of major customers and suppliers with whom they do business. Is the customer base growing and is the company’s supply chain not overly reliant on one vendor?
- Who are the major competitors? What differentiates this business from their competitors. What value does the customer derive from doing business with this company?
Once you have accumulated this information, be sure to have a qualified accountant and attorney review the documents. With their help you can determine if the asking price is fair and where you can take the business going forward.
Gray Poehler is a volunteer with SCORE Naples. Business counseling on this and other business matters is available, without charge, from the Naples Chapter of SCORE. Call (239) 430-0081 or visit https://naples.score.org/content/find-mentor-165 .The SCORE business office is located at 900 Goodlette Road North, in the Fifth Third branch bank building. Office hours are 9 a.m. to noon, Monday through Friday.