Once you’ve found a business that you would like to buy, it’s important to conduct a hard, objective investigation. Look into every aspect of the business, verifying whether the owner’s stated reasons for selling are legitimate; double check every detail for accuracy.
A qualified attorney should be enlisted to help review the legal and organizational documents of the business you are planning to purchase. An accountant can help do a proper evaluation of the financial condition of the business. To find an attorney in your area, use the American Bar Association’s legal directory.
Letter of Intent
A letter of intent usually creates a non-binding offer to purchase the business and is usually needed in order for the seller to provide sensitive information about the business. It should spell out the proposed price, terms, and conditions for the sale of the business. The letter should also state that either side may revise or quit for any reason.
Often required by the seller, a confidentiality agreement indicates that you won’t use the information about the seller’s business for any purpose other than making the decision to buy.
Contracts and Leases
It’s important to discover all the obligations that the business is subject to. Also be aware that you may have to work with the current landlord to assume any existing lease on the business premises or negotiate a new lease. If you acquire an existing lease from another lessee, you may have to pay the previous lessee for the privilege. The cost of acquiring your lease may be amortized over the remaining term of the lease.
Examine the financial statements from the business for at least the past three to five years. Also make sure that the statements are accompanied by an audit letter from a reputable CPA firm. Don’t accept a simple financial review by the business itself.
Review the business’ tax returns from the past three to five years. This will help you determine the profitability of the business as well as whether any tax liability is outstanding.
Numerous documents should be checked during an investigation. They include:
- real and personal property documents
- bank accounts
- customer lists
- sales records
- supplier/purchaser list
- advertisement materials
- inventory receipts/lists
- organization charts
- payroll, benefits, and employee pension/profit sharing info
- list of employees
- certification by federal, state or local
- list of owners