How to Buy a Business without Buying a Dud

By Karlene Sinclair-Robinson

Recently, I received an email from a former student asking the question: should I buy this business? This individual laid out the situation as best as they knew it; however, their gut instincts kept telling them they should seek help, and so they emailed me. I promptly contacted this person, as what they had outlined in their email communication required an immediate response, and not just an electronic one.

Here was the situation:

  1. The student was seriously considering investing a large amount of money into this existing business purchase transaction.
  2. The seller and current owner would not provide financial documentation such as past corporate tax returns, current Balance Sheet or Profit and Loss Statements, etc.
  3. When the student asked for said financials on another occasion, they were told by the  seller to visit Dunn and Bradstreet’s website for information on the company.

If you were in the student’s position, what would you do? How would you handle a situation like this? Should the student be okay with accepting information solely from an external website? I do not think so. 

After speaking with the student, they had one additional question. Based on their decision not to follow through on the transaction, they wanted to know if they should reconsider if the offer was presented at a later date and included the financials. In considering my answer to this question, I responded with the fact that there would be problems down the road.  These unforeseen problems could create financial and other issues to him, the buyer.

Why Financial Data is a Must in A Business Purchase

Buying any business can be a daunting and intimidating process, especially if it is your first venture into the world of entrepreneurship. Stepping into this realm without ever owning and operating a business is even worse.  Deciding to purchase an existing business certainly has it benefits; however, they can also carry a lot of existing issues. These issues could include delinquent taxes, poor management and or reputation, dwindling cash flow due to market over-saturation or other issues, not to mention possible debt to other investors, and much more.

In order to seriously consider buying any business, the seller must be willing to follow through on these points:

  • Present all current and past financial documentation upon request. If a particular item is not available, there should be communication detailing this and a reasonable timeline as to when said documents would be presented.
  • Business should have a ‘Good Standing’ status with the State Corporation with current date.
  • Purchase Agreement must include all and sundry that is appropriate to the purchasing of said business.
  • A list of all properties, equipment, debt schedule and current contracts, client and employee list, and any other appropriate data where applicable, should be a part of the process during the purchase negotiations.

Finally, doing your homework prior to completing such a transaction is important. Check Dunn and Bradstreet, the Better Business Bureau, the State Corporation Commission where the company is operating in, and when all else fails, use search engines like Google. Search the company and owners’ names, telephone numbers and any other appropriate information. Look for court cases and anything other items that might be of interest to helping you with your purchase decision. Work with your attorney, accountant, business broker and any other source that would be necessary for such a transaction, including a business appraiser.

Doing your part in the due diligence process will reduce your level of negative exposure and help you make a sound decision to buy or not to buy.

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