If You Are Buying a Business There Are A Few Things You Should Know
Are you seeking to own a business without the headaches of starting from scratch?
Buying an existing business may be the answer and may save you some anxiety. Of course, as with anything, it is important to know what you are doing to avoid a whole passel of OTHER headaches! The advantage is that someone has already built a business with customers, and, hopefully, a sound business model. Taking over that business can have pitfalls and here are few tips to follow when buying a business.
Do Your Research
From the outside, a business can seem to be doing very well and have tons of business. Looking closer at the financials often reveals a different story. It is important to complete a review of all the business data with the current owners before entering into a purchase and sale agreement. It is advisable, depending on your skills and experience, to bring in an accountant to review the financial data. Hiring a CPA or accountant from a firm such as CustomOne CFO & Controllers, can give you a leg up on the process and give you some professional assurance of what revenue and profits will look like. By exploring this data you will also reduce your risk in acquiring the business in relation to the purchase price and immediate cash flow.
Some of the data you will want to review with your accountant include profit and loss (P&L) statements for several years. These records of revenue, expenses and profits will give a sense of the actual profitability of the business. Examining them month by month can also reveal potential cycles in the business that may show cyclical downturns – maybe in the winter – or highlight areas for improvement. Along with the P&L, you will want to review:
- a projected financial statement for the upcoming period,
- three years of tax returns to verify the reported financial data,
- all leases on buildings and/or equipment,
- review utilities bills, and
- review various other corroborating data to validate operations.
Assets and Liabilities
Once you decide the business looks sound, your next decision is whether to purchase the entire business with its liabilities or only the assets of the business. Purchasing the assets means you are only buying the equipment, property, and other items of the business. You have to create a new business entity to begin business. If you buy the entity you are buying the name, assets, liabilities (bills and debts), along with all contracts and billings. Even with proper due diligence, there are often tax liens or unpaid loans lurking beneath the surface of the business.
Making these decisions can be difficult and may require business advice and expertise you don’t yet have. By hiring an accountant or CPA from CustomOne CFO & Controllers, you will get the assistance you need to make the right choices.
