Monday, July 7, 2014

10 Things to Consider Before Purchasing a Business

Buying a business can be a more attractive proposition than investing in a business someone else runs.  When you buy a business you have control over the operations and you are not gambling on people you don't know.  Buying a business is a risk that can offer significant rewards.  The key is to do your homework/due diligence before buying and understand what you are getting.  Here is a list of 10 things to consider before purchasing a business.
  1. Profitability: Look at the companies financial statements and income tax returns for as many years as possible and is relevant to establishing its value.  Keep in mind if they have been planning to sell the business the numbers they give you will likely be the best case scenario. Also, look at their projected profits and the basis for the projections.
  2. Trend: Trends are likely to continue.  So if the profits have been falling then they will likely continue to fall.  In addition to profits, what has been the trend for their revenues and expenses.  Most businesses are now seeing increases in costs and those increases are likely to continue.
  3. Competition: Who are their competitors and how does this business do relative to their competition.  What condition are their competitors in and what are they likely to do going forward.  Will they be cutting prices or aggressively going after market share?
  4. Payback Period:  How long will it take to recoup your investment and/or payoff the debt incurred to purchase the business.  In the very uncertain world we live in and its disruptive nature I would be very hesitant to buy a business that I could not recoup my cost in just a few years.  Three years from now all bets are off.  Five years and wow don't even count on a world that we would recognize today.
  5. Opportunities: Would owning this business create other profit opportunities for your other businesses? Are there opportunities in this market that you are aware of that the business is not taking advantage of.  The seller would not know about these opportunities which may make the business more attractive to you but don't pay for it.
  6. Legal Standing:  Is the business legally registered not only in the state it was organized but in all the states and countries it does business.  Also, is the business current with its tax and filing requirements.
  7. Taxes and What are you Buying:  From a tax standpoint it is often best to buy the assets, the customer list and a no compete clause rather than buy the business itself.  You may want to include the Receivables and Payables in the deal too.  From a tax standpoint it may be best to buy the assets rather than the company because you would be able to depreciate your cost of the assets rather than purchase the business with assets that have been depreciated already.  This will make a big difference when evaluating the value of the business to you.  It may be beneficial because of differences in depreciation to specify in the contract what you are paying for specific assets.
  8. Lock, Stock and Barrel:  Also, make sure you are getting all the assets you need.  Often a business will hold different assets in different entities.  Make sure you are getting all the assets that are needed like intellectual property, land and buildings.
  9. Operating Experience:  Do you have the expertise and experience to run this business.  Will key existing managers and personnel continue to work for you?  What assurances do you have the key people will stay with the business?  Will the seller stay on as a consultant for a period of time to provide some training for you to become competent?
  10. Obligations/Cost Structure:  What are the agreed upon benefits for the employees.  What debts if any will you be taking on and what are the payment terms.

As an added bonus consider number 11 to have an exit strategy.  Click here to check my post on this subject.

This is not a comprehensive list but as a CPA these are some general areas I recommend you consider before purchasing a business.  As always, what you need to consider will actually depend on the facts and circumstances.  In addition, don't try to do this by yourself.  Consult with an Attorney, a CPA and knowledgeable operating personnel.

The CPA Superhero wants you to succeed. If you would like the CPA Superhero to help you then feel free to contact me using my information below. 

Jeff Haywood, CPA
The CPA Superhero

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These posts contain general information that does not fit every situation, they are not all inclusive, and as always for your tax situation everything "depends on facts and circumstances."  In addition, the world and IRS requirements are always subject to change.  So call me to talk about your specific facts and circumstances and what you want to accomplish.