Buying a business is one of the best strategies for growth and expansion. Companies looking to acquire an established small business typically target enterprises that are generating a regular profit. Given the COVID-19 situation, you would also want to look for resilience and sustainability, and the ability to continue to operate in adverse economic and political conditions. You must take into account several other factors that can indicate the business is worth investing in. Here are a few tips to get you started in the right direction.
1.Robust Financial Health
It’s key to study the finances of the business to assess its health. Get in touch with an expert lawyer and accountant. Have them examine the current balance sheet, profit and loss statements from the last five years, and recent audited financial statements. You’ll also want to check accounts payable or the funds that the business owes to its creditors, along with accounts receivable or the funds owed by debtors. As long as the business owes less than it is due to receive, its financial health is on the right track.
2.No Outstanding Tax Obligations
Bring in an expert tax consultant to go over the returns from the last five years including income, sales, unemployment, payroll, use, and any other business taxes. These documents not only ensure you that the business has sound financial health, but you’ll also ascertain if the current owner has been keeping up with obligations to the state tax authority. It is also advisable to get a “clearance letter” from the concerned tax department proving that all taxes have been paid up to the date when you close the purchase deal.
3.Minimum Business Debts
Evaluate the accounts payable and the receivables and categorize them into 30 days, 60 days, and 90 days. This exercise will help you work out the cash flows through the business. Check with the creditors who haven’t been paid in the last 90 days. You might just find that they have placed a lien on the assets and can make claims after the business has been sold. If any ongoing debts are being paid off, factor them in. These payments can include out-of-court settlement claims, employee benefits, outstanding loans from banks or any other investors, lawsuits, loans from customers, or any other financial factor.
4.Secure Accounts Receivable
At the time of ensuring that the business is a financially good investment, you’ll want to discuss the accounts receivable and the possibility of bad debts. Work out if the current owner will be responsible for collecting the debts that people owe the business at the time of closing the deal. You can choose to purchase the accounts receivable at a discount, allowing for the fact that some of the debtors may not pay up. Alternatively, you can factor in these funds in the sale prices and allow the seller to collect the debts.
5.Condition of the Physical Assets
When you make an offer for a business, remember that you’ll also buy its physical assets, including any equipment and inventory. Hire an expert to examine the equipment and ensure that it is in good working condition. Also, evaluate its current market value. In case the machinery has been acquired on a lease, check that the terms and conditions allow you to take over ownership. Get the inventory examined to value its price and salability. In case some of the goods are obsolete, damaged, or faulty, you can renegotiate to have them removed from the purchase price.
6.Transferable Status of Business Premises Lease
Most businesses are housed on leased premises. At the time of buying the business, get a copy of the lease agreement and review it in detail. Check for duration, favorable terms and conditions, and any provisions for transfer to a new owner. The approval of the building owner may be required for purchasing the business. You also want to ensure that all rent payments are up-to-date, or you risk a surprise eviction. Negotiating for more economical rent would be a good move at this point.
7.Transferability of Digital Marketing Accounts
Almost all businesses use social media and digital advertising to market their products and services. Now that you’re taking over ownership, do check for the possibility of continuing the market presence developed by the seller. Any business that’s maintaining a social media presence knows that this intricate process that can take months, if not years, to gather steam. At the time of negotiating the sale, ask about taking control of accounts on LinkedIn, Twitter, Facebook, YouTube, Instagram, or any others.
8.Legal Status of the Business
Bring in the legal expertise of professionals who are knowledgeable about mergers and acquisitions. You might need advice on how to buy a business, which is a corporation or LLC. In case the business is a corporation, you’ll want to check for the state where it is registered and if it is operating in its home state. If you’re buying the corporation as an entity, you’ll also buy the stock. Accordingly, you ‘ll need to examine all the legal documentation related to the incorporation, operating agreements, by-laws, and resolutions, among others. But, if you’re only buying the assets of the business, the legal paperwork and purchase deal will be designed as applicable by the laws of the state.
Buying a business involves several legal, practical, and other factors. It is advisable to conduct due diligence and do the necessary research before you finalize the deal. Your best bet is to hire experts who are well-informed in their respective fields to guide you through the process. Take your time to find out everything you can before making the purchase. You might be able to purchase a great business idea that has the potential to bring you rich returns.