As one grows older, it is likely that they will eventually make some large purchases including, buying a house, purchasing an automobile, or taking out a loan for personal or professional reasons. Of all the purchases that one makes in life, few are as un-apologetically complex as buying a business.
At Accounting Solutions Ltd. we are often approached by Chicagoans who want to expand their professional portfolio through the acquisition of another organization. While on the surface this may sometimes appear to be a relatively simplistic transaction, in reality there is much due diligence that purchasers should make prior to submitting an offer. Unlike purchasing a homogeneous product like an automobile, buying a business is a multi-faceted process differing on a case-by-case basis. One should always be mindful of how taxation and changes to the economic climate may affect the company. These are items where CPAs specialize in providing advice. As there are many questions that one should be asking when making this purchase, we have assembled a collection of some of the most common ones that rise in this scenario. All of which we highly recommend you take into serious consideration.
1.) Check The Financial Records: Asking the seller about financial records is an imperative part of the transaction process. It can show whether or not the purchase is worth the price they are asking, or anything at all. We recommend asking for records going back at least three years. These numbers can be used to study the viability of the enterprise and possibly even predict the financial future of the business.
Further, make sure to ask for the tax returns as well as the accompanying financial statements. Internal financial statements provided by the current ownership of the business cannot be trusted. If they are going to lie to someone, it probably isn’t going to be The IRS. Make sure that you give these records to a Qualified CPA or EA. As people who complete these returns and Financial Statements for a living, we can tell you much more about the numbers, then you will be able to derive on your own. If the seller refuses to provide the returns and financial statements, you may want to walk away from the deal. Ask yourself what they are hiding. Whether they are lying to you or the taxation authorities, this is probably someone that you don’t want to do business with.
2.) Why Are They Selling?: People don’t usually sell their businesses just for the fun of it. Prying into the reasoning for selling is certainly a good idea. It will help you determine if there are ulterior motives at work. No matter what their answer is, it can certainly either add or subtract from a potential purchase price.
3.) Are They Staying With The Business?: It is pretty easy to assume that the individual(s) selling the enterprise in question likely have a better understanding of it’s operations than you do. Any owner that does not want to stay with their business after a sale, probably doesn’t care about their customers very much. If they cannot stay for health reason, its another thing altogether. But if they can stay and they care, then they should want to stay.
In order to ensure an orderly transition, you are going to want the current owner to aid in that transition. This way they can show you the ropes of how to operate the company properly. A good benchmark to determine when their help is no longer needed is when their assistance becomes a hindrance rather than an asset. Your CPAs may also want to meet with them in order to properly lay out financial plans, bookkeeping, and tax returns.
4.) Check The Financing: Most business acquisitions use financing on behalf of the seller as a part of the negotiations. Even if you don’t need this financial boost, you should ask. If the current owner is willing to finance part of the purchase, it will prove the seller’s commitment towards the viability and future growth of the business. Its also possible that the financing offered by the owner has better terms then what you might be able to get from a lending institution.
5.) Pinpoint the Decision Maker as Soon As Possible: If you are dealing with a surrogate, someone who actually has no control over whether or not the enterprise is actually sold, you might just be wasting precious time. We strongly recommend dealing directly with the decision maker. How else will you be able to determine, if this is someone that you want to associate with in the first place? Imagine writing a big check, and then finding out at the closing that the prior owner is just a jerk that you are now tied to in order to learn the business? Based on the owner’s personality and professionalism, you may decide that you don’t want to complete a sale. The business, in most instances, is just an extension of the owner in the first place.
Buying a business is a very complex procedure. The best way that one can prepare for such a transaction is by gaining as much information as possible. If you ask the right questions, you should be able to determine if the investment is worth your while. For the sake of our readers’ time, this list is but a few of the questions that one should have in mind when delving in this often, convoluted process. Whether you are on the “Buy” or “Sell” Side, feel free to give us a call. Our experience team is always happy to help.