How Can You Make Sure a Business is Worth Buying?

When you find a business for sale you’d love to buy, what can you do to make sure it’s a sound investment? No matter how hard you’ve fallen for your prospective business, you need to focus on conducting due diligence to achieve the best outcome. Mostly this involves thoroughly checking the information provided by the seller to verify the value and condition of the business – it’s the best way to assess its worth and any risks associated with buying it.

Due diligence generally falls under three main headings – financial, legal and commercial. You’ll want to recruit the services of a good accountant, solicitor and maybe a financial adviser to help you negotiate the important points of the contract. At the end of the process, you should know exactly what you’re getting into, what needs fixing and how much it’s going to cost.

Getting Down to Brass Tacks

You’ll need to scrutinise the company’s audited accounts. Ask to see the balance sheets, income and cash flow statements, as well as three to five years’ worth of tax returns (you may have to sign a non-disclosure agreement). When you review them, you’ll be looking to check that the business is receiving payments and settling bills in a timely fashion, that it’s maintaining a viable profit margin and a healthy cash flow. This forensic examination will also reveal any bad debts which may have to be written off.

Although sales will be recorded in the financial statements, make sure to look closely at monthly sales records. Analyse them by product line, as well as by cash and credit transactions to gain an insight into the business’s sales cycles, comparing them against industry norms where you can. Ask for the sales figures of the company’s ten largest accounts for the past year – these could be coded if the seller doesn’t want to release their names. You’re mainly interested in mapping buying patterns.

Covering the Legal Aspects

Instruct a solicitor experienced in business transactions to make sure nothing slips your notice. You’ll need to make sure you check copies of all contracts and legal documents including leases, purchase agreements, distribution agreements, business employee agreements, and any other legal documents relating to the business. Find out whether any leases are transferable and whether permission is required to assign the lease.

Checks will need to be made to discover if the business is adequately insured and that any licences and permits are current. You’ll also need all the relevant information regarding employees’ contracts and responsibilities to ensure a trouble-free transition.

Understanding the Business

Analyse your prospective business’s location, reputation and the strength of its competition. Look closely at the industry and economic outlook, in general, to determine whether sales are likely to grow, decline or stagnate. Evaluate product pricing and consider whether (and when) you can raise prices.

A full investigation should be made of the company’s operational procedures. If you’re buying fixtures and fittings, you’ll need a list of all items and an evaluation of the condition and market value of each. You (or your representative) should be present at any inventory valuation to check its condition and saleability as inventory valuation is usually subject to negotiation.

The more thorough your investigations at these early stages, the more likely your chances of sustained growth and continued commercial success.