Sometimes buying an existing business can be a golden opportunity. But remember, the devil’s in the details! Ensure that the seller isn’t the only one who is striking gold; keep your small business purchase on track by using this business checklist…
Check: The Financial State of the Business
This is the most critical question of all as it determines your earning power and future viability. Carefully evaluate all financial statements over a prolonged period – five years if possible – and compare them with norms within the industry. If they’re too low, or even too high, then something’s wrong. Compare tax returns for the same period and try to find out whether the owner has put personal expenses through the company books, a tactic which is common in small businesses. You need to do this so you can get a better idea of the true net worth of the business.
Check: The Business’s Ability to Generate Cash Flow
This is a crucial factor in the early stages of your business acquisition. Will you be able to generate cash flow from day one, or will you have to carry the business for several months before money starts to come in?
Check: Legal Documents and Contracts
These are vital – failing to ensure that all the ‘t’s are crossed and ‘i’s dotted could put you out of business very quickly. Check for the necessary council or government permissions; for example a liquor licence if you are buying a restaurant, or fire department safety approvals if you are handling flammable items. Others examples of documents and contracts include copyright agreements, patents, trademarks, import and export permits, mining rights etc.
Check: Location and Premises
One of the key reasons for buying an existing business is often its location and premises. Is the lease in order, when does it expire and what are the conditions of renewal? Is there a rent escalation clause and, if so, when is it due to come into effect? Notwithstanding that the seller may have occupied the premises for some time previously, is it legally zoned for the type of business you intend to operate? Is the local authority considering any re-zonings which may hinder or benefit your future business operations?
Check: The State of the Property
Is it in good condition or run-down and in need of repair? Does it meet your current and future requirements, or will changes need to be made? Who is responsible for these, you or the landlord? Get background on the landlord – is he easy to deal with and does he meet his obligations to his tenants?
Check: The Business’s Employees
If you’re buying a small business, there’s simply no room for passengers among your employees. Do your homework with the key staff, in particular. Are they likely to depart with the seller, leaving you without critical skills? Have they perhaps been promised large salary increases which you will now be expected to fulfil? Are any staff about to retire, emigrate, or depart on maternity leave? Are there union issues on the boil?
Check: Furniture, Fixtures and Equipment
This includes all the office equipment, machinery and vehicles used in the business. Obtain the names, descriptions and model numbers of all items, as well as their lease or purchase details. Examine the condition of the equipment to determine its present market value or replacement requirements. Are maintenance agreements in place? If the equipment is in poor condition and needs to be repaired or replaced soon, this must be factored into the purchase price of the business.
Inventory is anything which is needed in order to create the product or service, or any completed or partially-completed product intended for sale to a customer. Itemise everything and give it a carefully-determined value. Remember, inventory may run into hundreds of thousands of rands and could be one of the reasons you are buying the business in the first place. Be aware that some inventory may lose value with time, or only have a value at certain times of the year. A thousand cricket bats will have little value in mid-winter, but will appreciate as summer approaches.
Check: The Business’s Suppliers
Are they substantial, established businesses committed to providing quality products and services? Do they fill orders on time and do they meet their warranty obligations? Are contracts in place, or do they supply on an ad hoc basis? When are these suppliers scheduled to announce their next price increases? Substandard, unreliable suppliers can result in a substandard and unreliable business.
Check: Sales Records
Analyse these carefully as they will be your future lifeblood. If the company enjoyed record sales in 2010 because it manufactured products used in the building of stadiums for the 2010 FIFA World Cup, you can expect 2011 sales to drop off dramatically. Look for seasonal patterns and evidence of sales cycles. Does the business have many customers, or is it over-dependant on one or two clients? Are any of these clients likely to leave when the business changes hands? For example, if the business’s biggest customer is a relative of the seller, is he likely to remain with you after you’ve purchased the business?
Check: The Debtor’s Book
If you’re buying a small business, the last thing you want is to be carrying debtors for months on end. If there’s a history of slow payment or non-payment, it may mean you’d be inheriting an underperforming accounts department, or a dubious client base with an undesirable payment culture.
Check: The Business’s Goodwill
The seller is likely to be including goodwill in the sale price, but is it really there? Talk to current and past customers to get their impressions. If it’s a local retailer, keep your ear to the ground and ask questions among the local community. Ask to see correspondence regarding customer complaints and find out how they were handled. Put the company name into an internet search engine and see what comes up. Run a check on the Hello Peter consumer complaints website.