Starting a new company or buying an existing business can be challenging at any time, but it comes with increased pressures and considerations during volatile economic periods. It’s estimated that roughly half a million U.S. businesses are sold each year in up and down economies.
Purchasing an existing company has advantages as it can remove startup costs and other pressures over hiring from scratch and establishing practices and policies for workers. But long before you close the deal, you must consider the advantages and disadvantages you’ll inherit. Here are some tips for potential buyers.
Searching for a good fit
The initial step for prospective entrepreneurs is determining what type of business they want to buy and searching for companies that may fit their particular area of expertise. Once you identify a promising venture, it’s crucial to understand why the current owners are selling. Here are some red flags:
- The company is in a bad location
- It has significant business debt
- There’s a limited market for the product or service
- They have inventory problems
- The equipment is old or outdated
- Competitors control the market
Protecting your investment is crucial. Make sure you not only talk to the current owner about the company’s strengths and weaknesses but seek out opinions from customers, vendors and current and former employees.
Due diligence is a must
It’s advisable to work with an experienced business acquisitions lawyer to collect documents, statements and agreements to understand the company’s financial condition and the legal requirements. During due diligence, your lawyer will help you gather essential information, such as:
- Organizational paperwork, including the articles of organization or corporation filed with the state of California
- Business permits and licenses
- Contracts and leases
- Financial paperwork, including balance sheets, tax returns, debts and sales records
- Inventory list
- Environmental requirements
- Zoning requirements
- Business organizational chart
Your lawyer and usually an accountant can help you locate this and other vital information to assess whether the business is a good fit. If the seller is serious, they will issue a letter of intent (LOI) when both sides have agreed to a sale price. The LOI should also contain a comprehensive list of all assets and liabilities included in the sale. Once due diligence ends, you make your final decision and draft the sales agreement with the help of your attorney.