1. Financial
Statements for 3 to 5 years which have been audited by a reputable
CPA firm. You shouldn't rely on “in house” financials or simple compilations
which are not always trustworthy. Obviously, profitable businesses
are usually more in demand that unprofitable ones.
2. Tax
Returns for 3 to 5 years. The financial statements provided should
match the tax returns. If adjusted figures are provided to account
for excess benefits to owners, be sure the information is accurate
and precise. Your accountant should review the Financial Statements,
Tax Returns, and any adjusted financials.
3. Accounts
Receivable and Accounts Payable. A careful, albeit skeptical,
analysis of the aging of the accounts receivable and accounts payable
on an account by account basis should be done. You should know who
the customers are and how they are paying their bills, as well as
how quickly the business has been paying its vendors after being invoiced.
A strong cash flow and good credit are important aspects of running
a business. Obviously if there are any liens, lawsuits, or judgments
filed against the company, that is another important factor in determining
whether the company is just struggling to stay alive, or is well able
to stay afloat.
4. Key
Employees. Many businesses have key employees which are critical
to the operation. You need to know whether these key people will be
staying on board, and what their requirements will be. It is also
recommended that you actually examine each employee file to determine
their length of employment and payroll history, and other related
factors. With respect to sales personnel, there are other issues to
contend with, including whether their customers will remain with the
company. Finally, if the owner is a key employee, a careful analysis
must be made as to whether the owner can be easily replaced. Your
attorney will probably recommend that non-competition clauses, and
various other protections be included in the final agreement.
5. Other
Factors. There are a host of other factors to consider, including
the location and appearance of the business, the terms of the premises
and equipment leases, signage, intellectual property rights, insurance
coverage, the condition and status of the inventory, furniture, fixtures,
equipment and leasehold improvements, transferability of licenses,
whether there are parking problems, existing security agreements and
outstanding loans, the status of banking relationships, credit card
facilities, zoning problems, what the competition is doing, and the
overall image of the business in the community.
6. Purchase
Price. The purchase price of the business is not something that
should be taken lightly. Most businesses can be purchased for less
than the asking price, and there should be extensive negotiation regarding
the price and terms (including tax aspects). A professional business
appraiser may provide insights into the final valuation. In addition,
to the extent that statements about various positive aspects of the
business are made, these should properly be included as warranties
in the final purchase and sale agreement.
