As an entrepreneur, you have the option to either start a business from scratch or buy an existing one. Whereas you may pride yourself in turning your business idea into a large company, the risks are quite high.
If you start your own business, you’ll need years to realize your goal.It’s also possible that the business may collapse long before you get there. So, save yourself from these risks and purchase an existing business.
The success of the entire process depends on how well you prepare. With that in mind, here are some basic factors to consider in the exercise. They’ll have an impact on whether you should or shouldn’t go ahead with the purchase.
Inventory
The inventory covers all the materials and products available for resale. Ensure you or your representative is present when evaluating the inventory. Also, ensure you get a record of the available inventory in the company.
Take your time to understand the financial method the management uses to appraise its inventory. In this way, you’ll determine whether the valuation process reflects the true value of inventory in this premise.
Check the inventory for its scalability. Assess its quality and age. Determine whether it’s in a good condition or not. Where you have doubts about the valuation process, raise your concerns and negotiate with the owner.
Fixed Assets
Fixed assets include all the immovable assets of the company. Such assets include vehicles, offices, and machinery. Ask your seller to give a detailed list that includes the names of the asset, the model number, and the purchasing cost.
Before settling on their rates, compare their initial cost of acquisition versus the depreciation over time. Check whether the asset has been maintained properly or not. Determine whether you will need to have any modifications in your office to make it presentable or not. This can also be location dependent. For example, if you are looking for businesses for sale in Michigan, make sure that you assess the assets in relation to their value in the area that the business is located in.
Copies of All Legal Documents
Before committing your funds in the acquisition process, check the pending contracts and all the legal documents. The contracts include the lease and sales agreements, subcontractor agreements, union contracts, sales contracts, and any other legally binding instruments.
Also, check other legal documents like the registered trademarks, articles of incorporation, patents, and copyrights. If you intend to buy a business that boasts omassive intellectual property, have an attorney to carefully examine it.
You also need to check whether some contracts like the lease agreement is transferable or not. Check whether you’ll need to get permission from the landlord or not.
Tax Returns
Small businesses owners utilize their businesses for personal reasons. They’ll have the tendency to buy personal products and charge them on the company accounts.
As such, the financial statements of the company may not reflect the true position of the firm as it is. You’ll have to use your analytical skills or hire an accountant to determine the actual net worth of this business.
You can compare these tax returns with the financial statements to determine the amount of money the business earns a year.
Use these results to negotiate for a better price and close the deal.
