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Deciding which business to purchase, gathering information to evaluate profitability, and weighing risk and reward are part of the due diligence required before buying a business. When a potential buyer has all the right information, the decision often becomes crystal clear.
What Information Is Needed Before Buying a Business?
Buying a business requires the assistance of experienced legal counsel and independent accounting professionals. An independent certified forensic accountant will conduct a forensic audit to gain a full understanding of the business’s assets and liabilities, operating expenses and profit margins. Vendor and client contracts, and employee documents must also be examined.
Meetings with vendors and clients are critical to know how well or poorly the business performs. Does the business have a good relationship with vendors, or are vendors disgruntled because of late payments? A survey of clients should be conducted to discern whether they intend to stay with the business. When possible, talking with competing business owners or colleagues at local trade or professional groups may yield valuable insights.
Are the Correct Licenses and Permits in Place?
Running a business requires federal, state and local permits and licenses, depending on the business and its location. Certain businesses require more than one type of license. Check on the existing licenses and permits. Confirm that the business is approved to operate and not missing any documents.
If the business has a physical brick and mortar location and does not own the building, a conversation with the building management company is necessary. Can the lease be taken over by a new owner? Were there issues in the past? The building owner or management company may be happy to have a new tenant, if the prior owner was not current on their bills. Therefore, do not mistake a welcoming owner or management company as an indication of a successful enterprise.
What Happens Before a Business is Sold?
A Letter of Intent (LOI) may be issued by the seller when both sides have come to an agreement of the price and what assets and liabilities are to be included in the sale. The LOI should not be signed until all due diligence on the part of the buyer has been completed.
What is the optimal ownership structure? Examine the benefits and drawbacks of a variety of structures. This changes over time, depending upon the interest rate environment and tax law changes. The business may be a C corporation, S Corporation, Partnership, Professional Corporation, or Limited Liability Corporation, among many others.
How Buying a Business Impacts Estate Planning
It is not uncommon for a business buyer to think purchasing a business will have little or no impact on their estate plan. This is not true. When buying a business, the owner’s estate plan needs to be reviewed at the very least, and depending on the circumstances, may need to be completely restructured.
Putting a succession plan into place shortly after buying a business may seem unnecessary. However, creating a plan for business succession, if the unexpected occurs, is as necessary as having an estate plan while the purchaser is alive and well. None of us knows the time or day when something untoward could happen to any of us.
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