Buying a business can be a life-changing event that can make you your own boss, rather than making money for others, you make it for yourself and your family. However, it’s crucial to approach it with caution, excitement, and thoroughness. Business acquisition due diligence is the process of investigating and verifying the accuracy of the information provided by the seller to the best extent possible, ensuring that you make an informed decision. In this blog, we'll explore the importance of due diligence and what it entails.
Due diligence is essential for several reasons:
It helps identify potential risks and liabilities, allowing you to negotiate a better price, or dive deeper into the business with the seller to understand more.
Verifying financials, operations, and legal matters ensures you understand the business's true state as much as possible. Not all sellers will be able to provide you with all the financials you are looking for. You might find that many sellers will shy away from providing tax returns, however, they may provide Profit and Loss Statements, Income statements, or sales tax receipts or reports. You can review the financial statements provided and get an idea that do they are reasonable for the type of business you are buying or do they seem embellished. A second opinion is a good idea and will affirm your decision to proceed with the purchase or to move on to something else.
Due diligence uncovers hidden issues, preventing surprises down the line. However, if you are buying an established business, you must keep an open mind, meaning that it is not a new business with all new furniture, fixtures, and equipment. For example, if you were opening a brand-new restaurantwith everything brand new, versus buying a 10-year-old restaurant, you should expect that your purchase price might be lower, but your maintenance cost could be higher due to older equipment, fixtures, and furniture.
A good investigation demonstrates your commitment to the deal, fostering trust with the seller. I always let the seller know that this is their first business purchase, and you should be as open as possible, and provide all the details to the prospective buyer. For example, if buying a convenience store, the purchaser probably will want to stand by the register and verify, or they will verify the traffic count. Every business has different ways that a buyer will feel comfortable in the process.
Due diligence typically includes:
Analyze financial statements, tax returns, and accounts. Each situation is different, and you must use your best judgment and if needed, hire an expert in the field to guide you.
Examine contracts, leases, and legal documents. If you have owned a business in the past and are familiar with these documents, then you should be good, however, if you are buying for the first time or want to feel more comfortable, then hiring an expert and paying them to guide you is advisable. A good attorney or paralegal can review legal documents and provide a summary of the pros and cons of the terms.
Evaluate business processes, systems, and infrastructure. If you are buying a business that you are familiar with and have owned in the past, then you have a step up on the evaluation, however, if it is your first business, then talk with the owner, stand outside the business, and count the customers walking in or out. Stand with the owner and look at the systems to understand them and do your research online or in a trade magazine. What does the roof look like? Have you gone to the top to look at the AC unit? Who is responsible for maintaining and fixing that? If it is a brand-new building, no problem, if not, then you should expect downtime and be ready to budget that in your business.
Research the industry, competitors, and market trends. For example, if you are buying a fast-food restaurant, join the industry association, ask questions on the forums, and feel comfortable with that advice. Is your business unique or are you surrounded by competitors? Is your business going to struggle in the economy at that time? For example, during and after COVID-19, many business models changed, remote work was very common and when people work from home, they don’t wear a suit and tie anymore, which affected many Dry Cleaners. On the other hand, online shopping businesses started to see a spike in sales, because people wanted to avoid large crowds during the pandemic.
Interview key employees and customers to understand the business's human side. Many owners will allow you to speak to management that is willing to stay and work with the new owners, however, this is not common. Most sellers don’t want the employees to know they are selling their business to avoid uncertainty among the employees and see much leave before the business is sold. You can seek permission to talk to the employees in their presence, and ask certain questions to feel comfortable, but again, use your better judgment as they may not tell you everything.
Engage legal professionals, accountants, and industry experts to guide you, as needed, unless you have the expertise from experience or family members who can provide that advice.
Define your goals and priorities. Short-term planning and long-term planning.
Ask yourself, is this business for me? Can I put in the hours to be successful? Do I have a passion for this business? Some questions to consider before purchase. Have a chat with yourself and your family about the pros/cons written on a paper and review it often.
Ensure all parties involved sign non-disclosure Agreements.
Business acquisition due diligence is a critical step in buying a business. By conducting a good investigation, you'll make an informed decision, reduce risk, and set yourself up for success. Remember, due diligence is an investment in your future. You cannot possibly know everything beforehand about a business, and there will be risks involved, however, you should not deterred in buying a business and working hard to achieve success.
This blog does not provide any legal advice or replace any advice that should be taken from an industry professional. These are general guidelines to get you to think in the right direction. As a prospective buyer or seller, it is imperative to do your research to the best of your ability and then decide.
Contributor:
Laundry consulting, due diligence, buyer representation: We preview laundries for you and evaluate them. 28 years laundry industry experience: buying, selling, valuing, retooling, analyzing, consulting services for laundry buyers and entrepreneurs in California. Contact us today about our services.
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Laundry consulting, due diligence, buyer representation: We preview laundries for you and evaluate them. 28 years laundry industry experience: buying, selling, valuing, retooling, analyzing, consulting services for laundry buyers and entrepreneurs in California. Contact us today about our services.
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Cheryl's a restaurant business broker, over 25 years in the bar and restaurant industry coupled with a J.D. Cheryl works tirelessly to create successful strategies and effective negotiations for those who wish to purchase a new or sell an existing bar, restaurant, cafe, or night club. 415-309-2722
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