Purchasing a business is a major investment. Although the potential rewards may be enticing, there is always a chance that the decision could prove financially unwise. Before acquiring a business, it’s imperative to carefully weigh the possible benefits against the risks. Doing your homework starts with asking the right questions and patiently conducting due diligence on the company you want to acquire. If you plan to buy a business in the near future, talk to the Business and Corporate Law attorneys of SederLaw.
Due diligence is a broad term that includes steps a potential buyer can take to confirm the value of the business that is to be purchased. The goal of due diligence is to ascertain whether certain information about the company has been accurately presented to the buyer and that it’s truly worth the price tag. When due diligence is conducted properly, the buyer can make an informed decision as to whether to finalize the deal.
What to Ask Before Making a Business Acquisition
These are a few questions to consider asking the current owner of the business:
Why do you want to sell?
This cuts right to the heart of the owner’s decision to let go of the company. Perhaps the owner is retiring or moving on to another chapter in his or her life. But there may be other motivating factors which should invite further scrutiny. A related question: is the owner planning to start another business that could be in competition with the one you intend to buy?
Is there any active or pending litigation involving the company?
Has the company been sued or are there indications it will be in the near future? A lawsuit could mean damages or a settlement payout that could be financially devastating to the business – and whoever purchases it.
Are there any active or pending government investigations?
Similarly, the buyer will want to know if the government has provided notice to the company that it is the subject of an active or pending investigation. While any government investigation can be troubling, some of the most worrisome involve the IRS (and state taxing authorities), Securities and Exchange Commission, or any agencies like the FBI that investigate crimes.
Does the company have growth potential?
Find out whether there is room for the company to grow and thereby increase in value. Look for trends in profitability, along with sales and gross margin. While no one can predict the future, it is possible to reasonably project what may lie in store for the business down the road.
Are the company’s financials accurate?
This is perhaps the most concrete way to evaluate the value of the business. Not all businesses look as healthy when you begin to dig into records such as tax returns and profit and loss balance sheets. A knowledgeable business attorney can review these records to identify any discrepancies, errors, or red flags.
Who are the company’s most valuable employees, and will they remain?
A successfully run operation can thank its key leadership and employees for making the company what it is. Identifying who these individuals are is important, but will they stay with the business after the sale?
Which assets will go with the business?
Assets may include capital like equipment and vehicles. It could also include intangibles such as contracts, accounts, and intellectual property. The bottom line is that you need to know what you’re buying and what you’re not.
What does the future of the industry look like?
This is a broader question that tries to determine how the business may fare within its industry. Legal, political, economic, technological, and other external forces can spell opportunities or problems for the industry as a whole, which can translate to advantages or disadvantages for the business you want to purchase.
What are some challenges that frequently confront the business, and how are they resolved?
The essence of this question is to understand the practical issues that face the company on a daily basis. Are there supply chain issues? Management problems? Employee discontent? Ask the current owner the types of challenges that have arisen in the past year or two, and find out how (or whether) they were addressed.
The important thing to keep in mind when buying a company is that you can never ask too many questions. At the same time, some questions are more useful than others when it comes to fully evaluate the worth of the business. At SederLaw, we regularly counsel individuals and businesses who are looking to purchase a company. Give us a call today to learn how we can assist with your prospective acquisition.