10 Questions To Ask When Buying a Business—Do Your Homework!

Published in Nanaimo Magazine - December 2010 Issue

Buying a business is an arduous, yet rewarding process, and can take weeks or months. Because buying a business will involve investing a fair amount of money and time, it is critical to do your homework when gathering information about the business. This process is commonly referred to as due diligence.  It helps the buyer discover information such as whether the purchase price of the business is too high; the type and condition of the business being bought; bad financial situations if they exist, and contingent liabilities. There are so many questions to ask when considering the purchase of an existing business. In fact, there is not enough room on this page to list them. But let us give you a few examples that relate to financial, marketing, ownership and operations: 

1. Ask why is the seller selling—and verify the answer.

2. Ask to review the certified financial statements of income, cash flow and balance sheets for the last three years. If you borrow from a bank to pur- chase the venture, the bank will want to see them.  Recent audits and projections should also be reviewed.

3. Ask  to see the company’s Tax Returns (not the owner’s personal) for the last three years.

4. Ask for a copy of all documents of all outstanding indebtedness like notes payable, accounts payable, real estate and equipment leases.

5. Ask if the seller is willing to stay around for awhile after the sale to help with transition.  If so, have you discussed some compensation for his/her services during that transition period?

6. Ask if there has been any significant turnover of employees. If so, why? Ask to see employment agreements and organizational charts.

7. Ask about the quality of customer relations at the company. Review customer lists if possible.

8. Ask about the relationship between the company and its vendors. Do vendors display preferred, regular or irregular relations with the company?

9. Ask to review key contracts.  Also ask to see any litigation-related documents.

10. Ask for information about patents, copyrights and other intellectual property-related documents.

If you are contemplating small business ownership, feel free to give the Sunbelt Nanaimo office a call at 1-877-289-0969 or visit the website at www.bcbusinessbroker.ca or www.sunbeltnetwork.com/vancouverisland - we can help you find a reliable business that suits your background.  We are Certified Business Intermediaries with special training to help our clients analyze business opportunities and assess future probability of success.  President of Sunbelt Business Brokers, Michael Naprawa, is the Director of Education for the Canadian Chapter of IBBA (International Business Brokers Association), an organization that creates business standards and a code of ethics; and creates training and professional designations for Canadian Business Intermediaries.  Feel free to contact our Nanaimo office with your questions or comments.

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