Buying a Business - Conducting Due Diligence
Here is a list of some of the detailed steps you will want to do in considering buying or selling a business.
- A good attorney, I can refer you one, is the best protection (along with following their advice of course) for legal protection. When you get ready to go forward with the purchase then I will refer you one.
- To do due diligence, I suggest that we get at least two years of financial statements and tax returns, a year to date financial statement for this year including the balance sheet and the profit and loss, a copy of all material leases that you plan to assume, a non-compete on the prior owners and any key employees, and a list of all fixed assets and their fair market value that you will be buying, a detailed list of all inventory at cost, a list of open receivables, and a list of open payables.
- I suggest that you also have some specific procedures done to evaluate the integrity of the financial statements (i.e., consultations with their major vendors, customers, review of checks written, consultations with their banker, their prior CPA, and tracing a month or two of detailed deposits to the bank statements along with reconciling the total bank deposits for the year to the financials). Also I would suggest getting copies of detailed payroll records for employees and independent contractors so that you are aware of the staffing needs/requirements and those monetary considerations. I would then suggest that a Good CPA review these in detail looking at trends, the market, and other demographic data, and concentration of business & clients, technology etc. etc. to ensure you are aware of what you are buying.
- If you were buying real estate, I would get an appraisal done by someone independent of the business.
The above is a good list to get started and then to see where these answers/questions take you. Please note however, there is no substitute for the facts and intuitiveness that a Good CPA/financial adviser can bring to the table to evaluate buying a business and its purchase/sales price.
We frequently assist purchases in evaluating not just the financial aspects of a purchase but also in evaluating many critical components which might otherwise might be missed. By retaining our firm you will gain a comprehensive view of the many variables of affecting a business's short and long term profitability and viability.
