Buying a Business Checklist
1. Review the business records and terms and conditions:
-What do the financial statements and tax returns for the past 2-3 years show? The income statement, balance sheet and cash flow should be available. If not, effort should be make to construct these statements. -A balance sheet is necessary to determine if the inventory of assets is complete and what value they have been assigned. Write offs may be required for book purposes -Are all expenses included, including a salary for owner? -Are taxes current and paid (e.g.: payroll withholding, social security, sales/use, property taxes)? -If sales taxes were collected, what do the records at the city sales tax offices show for taxable revenues and does that match the financial statements and tax returns? -Are there any loans or debts that will be assumed by the new owner? -If assumptions of debt, will the debt holder agree to the transfer and will the terms remain the same? If not, what are the new terms and impacts? -You may want to involve an accountant to review the business records to assess the business results and key ratios such as gross profit, net profit before taxes, return on investment or assets, assets and liabilities, especially accounts receivable, accounts payable, fixed assets, debt/loans/notes. -How will you determine a fair value to pay for the business independent of what the seller is asking for the business? A professional can help determine value based on cash flow, asset value or some other means. If an outsider engaged to assist in preparing a value, make sure they are working in your interest only and not those of the seller as well.
2. If a building is involved or other real estate:
-Is the lease or mortgage assumable, and if so, will the terms or rates change? Can the business income support the expenses? -Are the new lease terms acceptable? (e.g. Length, renewal, assumable) -If buying a building, are the zoning and other codes transferable to the new owner as is? If not, what remedial action will have to be taken and how much will it cost? -If permits or licenses are required, can they be obtained in the new business owner's name? (e.g.: retail license, liquor license) -What is the assessed value of the building and are taxes current? -What will the new assessed value and annual taxes be after the sale? -Are there any liens on the property that have to be removed before sale? -Is there anything that could change zoning or conditions in the future? For example, if the street is to be widened, would parking or sidewalk space be lost? Are there any taxing programs that the new owner would have to continue (e.g.; downtown improvement programs, historical district)? -What are the terms and conditions for common maintenance; who does what and what are the fees? (e.g.: snow removal) -Shopping center associations and covenants (mandates, participation in promotions?) (continued) Colorado Springs SCORE Chapter 206 6 South Tejon St., Suite 700 (in the Chamber of Commerce) Colorado Springs, Colorado 80903 719-636-3074 www.coloradospringsscore.org
Buying a Business Checklist (continued)
3. Customers and Marketing
-What is the customer list available from the existing business? Is it transferring? -What are the opportunities to increase customers for the business? -What advertising or promotion did the former owner do? What was effective? What was not effective? How much did it cost? -Will existing advertising placement remain and is it prepaid? (e.g.: yellow pages)
4. Administrative
-Is new letterhead, business cards, invoices, etc required and has it been ordered? -Are employees going to be involved in the business? Are payroll taxes current? -Will the employees remain and at what rate of pay and employment conditions? -Who will perform payroll (inside or outside service) -Is the business name registered and are EIN and tax ID numbers available? -Do telephone numbers have to be changed? -An attorney probably should be involved to review or draw up a contract of sale and the terms and conditions that apply. -The legal entity should be decided upon and if a partnership is involved, a partnership agreement should be developed before beginning business to define how each partner will participate in the business, who will make what equity contributions, how the partnership will be run and profits distributed, how a partner could get out of the business and how the business will be valued if a partner chooses to get out and if the other partners have to buy the selling partner out. Also succession if one partner dies. -What accounting system will be used in the business? Is the owner capable to use it and keep it accurate/current? -Are there other specialized systems or procedures for the business that have to be used or maintained and if so, is someone able to effectively use them? -If credit card sales are to be accepted, are the arrangements for processing the transactions set up and what are the charges and fees? -How will credit be extended to customers and what will be the terms? -The prospective owners should meet with key vendors and suppliers. Review any agreements, discounts, understandings or other conditions that would affect business. The same thing may need to be done with key customers as well. Armed with the knowledge and information from above, the prospective owners should develop a business plan for the acquired business. The key portions would be a marketing plan to maintain or secure new customers, how the business will be operated by the owner(s) and the key employees and the financial projections. The financial projections should include the last 2-3 years of actual results from the former owner as well as projections of the next 3 years, the first year by month, of sales, expenses, profits and cash flow. A balance sheet should be prepared as well. This will be the basis of an operating plan or budget for the business and the actual results should be compared to the plan the first year. Then the next year an updated monthly operating plan/budget should be prepared. Include changes based on actual experience. Review the plan/budget versus actual results monthly and take corrective action as required.
5. Franchises; a special case with special requirements