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Look Before You Jump - Doing Due Diligence


Doing Due Diligence When Buying A BusinessOnce you have an accepted offer, the clock starts on the due diligence period which ranges from 17 to 30 days according to the terms of your Purchase Agreement.  Some of the items to review are:

Three year's tax returns on the business in one of the following formats:

a.  Audited /best
b.  Reviewed /better
c.  Compilation letter /good

Three year's profit and loss statements plus the year-to-date P&L

Sales tax reports, if applicable

Lease on the business

Bank Statements for the previous year and year-to-date

Contracts with vendors and employees

Lease agreements on equipment

Other items that are business specific, i.e.; franchise agreements

The above materials should get you started on the road to due diligence and buying a business. Another good strategy during this period, if agreeable to the sellers, is shadowing them to get a good look at the business operation.  The due diligence period of a sale is the dating period for the buyer and seller.  The close of escrow is like exchanging vows-- once you close escrow, it is too late to reverse the sale.  As Davy Crockett once said "be sure you are right, then go ahead, and never look back".  It's the same principle with a business sale; you like it, you review it, you buy it, then you make it successful.

Determining cash flow is the most important goal of the due diligence process.  For all intents and purposes you are buying a job and must be sure the business will meet your expectations.  Cash flow is considered the total amount of money an owner can get out of the business.  This includes items such as salary, taxes, insurance, autos and auto expenses. Additionally, non cash items such as depreciation and amortization, profits, entertainment and travel, retirement fund, parties, gifts, and any expense items that are incurred at the owners discretion and not required to run the business.

In my experience, buyers project improving the business 10 times better than the seller's current efforts, and in most cases they do end up with greater numbers than the previous owner.  Sellers often get tired eyes after a few years of operating a business. Once you've been in business for a few years, let's face it, you've most likely tried everything at least once.  Buyers will probably try the same things again and then some, but with a different twist, or at a different time. Fresh eyes and energy are what make a business succeed.

Due diligence is a process to make sure you are getting what you expected, laying the foundation where you can invest your new enthusiasm to grow the business. There is nothing better than being your own boss and driving your own success.

Bob HughesAbout The Author:  Bob Hughes is a business broker in the Coachella Valley (Riverside County) and San Diego County areas assisting business buyers and owner/sellers throughout the Inland Empire. You can reach Bob by phone at 760-323-8311.

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







  Helpful Resources To Assist In Selling And Buying California Businesses
Michael Davidson, Business Broker - Southern California

Los Angeles Business Broker providing M&A quality services for Small Business Owners. We leverage our technology and expertise to Simplify & Expedite the Business Sales Process. Matching the right buyer with the right business is how we define success.

Joanne Weber, Broker: Preschool Specialist, Southern California

The Ryan Craig Company is in its 35th year as the recognized expert in Southern California, dealing exclusively in the sale of preschools, Montessori schools, day care centers, and private schools. Our extensive list of references speaks for itself. Phone Joanne at 818-760-3684 for more info.

Lee Petsas, Business Broker - Southern California Area

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Bob Hughes, Business Broker: Coachella Valley Area

Bob Hughes is a business broker & is President of Hughes Properties. Hughes has a wide variety of entrepreneurial experience with the personal ownership & sale of numerous businesses, and has sold over 200 small & mid-sized businesses in the Riverside County marketplace. Call Bob at 760-323-8311.

Peter Siegel, MBA, BizBen Founder, ProBuy, ProSell Programs

Founder & President Of BizBen.com (since 1994) & BizBenNetwork.com. I am the Lead Facilitator for the ProSell & ProBuy Programs on both websites. I consult daily with buyers, sellers, and intermediaries daily about buying and selling businesses. Call 925-785-3118.

Ryan Clark, Business Broker: Southern California

The Veld Group provides a refreshing approach to Business Brokerage, Mergers & Acquisitions and Business Consulting and Valuations. From Your Street to Wall Street, we cater to Main Street Businesses as well as more complex Strategic Firms and Start-Ups. Phone Ryan, Business Broker at 310-652-8353.

Steve Zimmerman: Restaurant Broker Specialist, California

Steve founded Restaurant Realty in 1996. He has personally sold/leased over 900 restaurants, bars & clubs, & completed over 3000 valuations. The author of "Restaurant Dealmaker - An Insider's Trade Secrets For Buying a Restaurant, Bar or Club" available on Amazon. Reach Steve direct at 415-945-9701.

Mani Singh CBB, M&AMI, Business Broker, Southern California

I have successfully represented clients sell & acquire multitude of businesses ranging from Gas Stations, Liquor Stores, Markets, Super Markets, Smoke Shops, Postal Stores, Restaurants, General Retail, Auto and Construction related. Phone me for assistance with selling or buying at 951-296-7646 Cell


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Veld Group Business Brokerage Los Angeles County
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