Due Diligence Checklists - 10 Things To Investigate When Buying A Business


10 Things to Investigate When Buying A Business

Due diligence checklists are needed by entrepreneurs buying a business so he or she can conduct a careful analysis of any company that seems a good purchase candidate. These checklists also helps the seller know what information to provide.

On the due diligence checklist for proactive business buyers there are:

1. Profit and loss statements and balance sheets describing the company's financial performance represent one of the first things to look at. Older guidelines suggested the buyer get at least a three-year history of income and expenses to determine the degree of profitability, and the list of assets and liabilities to see what changes have been made over the period being reviewed. Because of the recent dips in the economy, it now is recommended that the buyer review five to seven years' of history to gain an idea of the overall financial pattern for the business.

2. Supporting financial documentation to review includes accounts receivables and accounts payables legers, depreciation schedules and related reports. If the buyer requests and seller agrees to a more thorough analysis, the due diligence may include a review of bank records, tax returns, vendor invoices, along with sales and payroll tax filings. Supporting documentation might also include equipment maintenance records and employee files.

3. Premises leases and equipment lease agreements should be reviewed so the buyer understands the lessee responsibilities under those agreements.

4. Additional investigation includes a call to the better business bureau to learn about the company's reputation in the community, and an analysis of account concentration to verify that the business is not relying on just a few customers. Conversations with key employees, major vendors and any landlords will help reveal whether the business has a record of honest dealing and prompt payment of obligations.

5. Are the business permits and licenses valid and up to date? Checking with the issuing agency might be a good idea if there is any question about the authenticity of the documents shown.

6. The list of all assets to be sold to the buyer should be reviewed. It will be referenced shortly before close of escrow. That's when the purchaser should investigate all of the equipment, machinery and other property of the business, to make sure it is in working order, and, if needed, properly registered and inspected.

7. Some detective work on the part of the buyer also is recommended. In the case of a retail business, for example, it's important to "case" the neighborhood to learn how many similar companies are located close enough to the business to be competitors. There usually is no single rule regarding how much competition is too much, so the buyer will need to make a subjective judgment about the possible threat posed by other nearby businesses. The point is to make sure and conduct this part of the due diligence study.

The detective work might include visiting the city's planning department to learn if any dramatic changes are scheduled for the area. More than one buyer has wished he would have done this before buying an enterprise that went out of business shortly afterward, because a large competitor moved into the neighborhood. Or because road or building construction disrupted the auto or foot traffic on which the businesses depended.

8. Industry specific investigation also is recommended. Are new environmental regulations about to make the company's equipment obsolete? Also a problem is out-of-date vending machines that put the business owner at a disadvantage when competing with other businesses using newer vending technology.

Industry specific knowledge also is useful when determining if cost of goods and other business expenses are in line with those of other companies in the business.

9. Right before close of escrow an inventory of all products for resale, as well as parts and supplies should be conducted to make sure the value equals the amount being paid for these assets.

10. Also of concern is that the seller holds clear title to any and all assets of the business being sold, unless disclosed otherwise. The buyer wants no surprises. Since title searches are ordinarily the job of the escrow officer, this aspect of due diligence will likely be covered. But it's a good idea to make sure the escrow holder is experienced at handling business transfers and knows how to do this properly.

Due diligence is a critical step in buying a business and it's important that the process is conducted as thoroughly as possible.

For more info - read more articles and blogs about due-diligence - go to: Due Diligence Articles & Blog Posts

For a list of Due Diligence Advisors & Professionals - go to: Due Diligence Consultants And Advisors

For a list of Discussions regarding due diligence issues brokers and agents have experienced - go to: Due Diligence Discussions

Categories: BizBen Blog Contributor, Buying A Business, Deal And Escrow Issues, Due Diligence Issues, How To Buy A Business

Contributor:

Peter Siegel, MBA
Areas Served: All Of California
Phone:  925-785-3118 Cell, 925-785-3118 Text
Founder Of BizBen.com (since 1994). I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I consult daily with buyers, sellers, and brokers daily about buying and selling California small to mid-sized businesses. Call 925-785-3118.

Comments Regarding This Blog Post

Contributor: Business Broker: Southern California

In addition to the BBB, a simple google search of the business name and "complaints" sometimes yields interesting results. Also, while you need to be careful of competitor trolling and leaving complaints, YELP can be a good indication of what the general public thinks. I wouldn't make my decision based upon four reviews, but if they have 100 and 80% are negative, that is cause for further investigation. I certainly wouldn't rule out a business with negative YELP reviews as it might be an opportunity for the buyer to improve the product or service and in doing so, improve the profitability.


To this list I would add:

11. A fully completed Comprehensive Disclosure Statement, signed and dated by the seller. The form we use is three pages long and contains over 50 line items about taxes, legal matters, warranties, liabilities, etc. With this statement, the seller is making a representation of truthfulness, and will be liable for any false answers. The buyer can use the statement to investigate any questionable matters and get further details.

12. An insurance review and a conversation with the current business insurance agent. This will help establish risk exposure and determine if the current insurance (and insurance expense) is sufficient moving forward.

13. Key employees, especially managers, who will be continuing with the business should be thoroughly vetted, particularly checking for any past record of criminal activity or fiduciary malfeasance.

14. A thorough review of all intellectual property, e.g., trade name(s), brand name(s), domain name(s), logo(s), patent(s), copyright(s), to be sure that they are truly proprietary, are enforceable, are current, and are transferable.


For liquor stores and other retail locations, I advise the buyer to call the local police department and speak with the watch commander to see what type of crime there is in the area, and if that particular location has ever been held up. If the location has been held up numerous locations, the buyer may want to see if the seller is willing to pay for bullet proof glass at the register. No business is worth dying for, no matter what the gross sales are, but a smart owner can protect themselves with bright lights, working cameras, and other precautions.






  Helpful Resources To Assist In Selling And Buying California Businesses
Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Janet Carrera: Escrow & Bulk Sale Service - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Shalonda Chappel: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

William F. Ziprick, Attorney: Legal Services For Buyers And Sellers

Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.

Elizabeth McGovern: Escrow Services - San Francisco Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Helen Yoo, New Century Escrow - Escrow Services In Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Brad Steinberg, Business Broker: Laundromat Specialist

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.


  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews
Absentee Run Small Businesses - Is That Really A Possibility For Buyers?

Is buying a absentee run small business really a possibility? Peter Siegel (BizBen ProBuy Director) gets asked this question a lot in his consulting sessions with business buyers. Read more about what other Advisors and Intermediaries feel about this topic on this popular BizBen Discussion!

BizBen ProBuy Program - Professional Assistance With Buying A Small Business

Buying a California business can be a confusing and/or frustrating process for many business buyers. Statistics show that over 80% of all buyers never end up buying a business. The BizBen ProBuy Program assists potential buyers of California businesses with the process of buying a small business.

Financing Advice: Showing Add Backs To Get Business Acquisition Financing

When seeking business acquisition financing, it helps to review a seller's addbacks as a source of funding to service the debt service. But explain them correctly. Peter Siegel, MBA business acquisition financing expert and advisor at 925-785-3118 covers this topic on financing a business purchase.

Need Financing To Buy A Small Business? Business Purchase Financing Details

What are actual adjusted net earnings (cash flow) of a small business being purchased with business acquisition financing? That's an important amount that lenders need to know. Peter Siegel, MBA (BizBen.com's Lead Advisor - ProBuy/ProSell Programs) reviews this concept with BizBen Blog readers.

How Many Listings Is Too Many For One Broker To Handle? Is It 5? 10? 20?

Peter Siegel, MBA in this Vlog/Podcast discusses how many listings is too many for one business broker to handle at one time. Is it 5 is it 20? I recently had a coaching call with one of my BizBen broker clients who asked that question this week. There are many factors that go into the answer.

Confidentiality: Why Keeping A Deal Quiet Is Important To Sellers And Buyers

Owners should keep the fact that they want to sell their small business confidential. Before releasing information to prospective buyers, buyers should commit to confidentiality in writing & should understand why it is important. Peter Siegel, MBA a ProBuy and ProSell Advisor with BizBen explains.

What Should I Do If Other Buyers Are Trying To Buy The Same Business As Me?

Buying a small business is hard enough when there is no competition, so how might a buyer navigate the process when there is additional competition from other buyers? Potential small business buyers are offered a few key ways that a buyer can beat out other potential business buyers in this article.

Selling Your Business To One Of Your Employees - A Good Idea? Pros And Con

After investing years of time and talent into a company, many small business owners want to feel like they are leaving their business in good hands and for that reason, some sellers opt to sell their business to an employee. Peter Siegel, MBA talks about the pros and cons to taking this route.


Escrow Services Diane Boudreau-Tschetter
Harry Sidhu SF Bay Area
Escrow Services From Helen Yoo New Century Escrow
Jim Saxton SF Liquor Licenses
Facebook
Twitter
Linkedin
Vlogs and Podcasts
BizBen ProSell Program
BizBen ProBuy Program
California Educational Events Buying And Selling Businesses
Instant Email Alerts On BizBen
Advertise On BizBen

BizBen - Where California Deals Get Done! 888-212-4747
7172 Regional Street #364 · Dublin, CA. 94568
BizBen · Copyright © 1994 - 2020, All Rights Reserved



Clost Login


Please confirm your registration by clicking the link we've sent to .

If you can't see it, please check your junk mail folder.

If you have any problems registering, or need assistance with your new BizBen User Account please phone BizBen Customer Support at 888-212-4747.



First Name:*
Last Name:*
Email Address:*
Confirm Email:*
Create Password:*
Confirm Password:*
Phone:
(   
 


You Are A:
Individual
 
Intermediary
 

Email Address:
Password:
 

500 New & Refreshed Detailed Postings Daily
Over 2500 Resources Available On BizBen
Since 1994. Where California Deals Get Done!
Uncover Hidden Problems In Due Diligence When You Buy A Small Business
Read More News
Pricing A Small Business For Sale - Several Factors Play A Valuation Rol...
Read More News