Buying a Business? Sharpen Your Pencil

You might hope that buying a business will fast-track you into being your own boss, ease you into an attractive lifestyle and maybe even make you some money. If your destiny is to be so rosy, you've got some homework to do before signing away your hard-ea
ed equity. Here are some points to consider:

1) Determine why the business is for sale.
The seller might have a story that brings tears to your eyes, but the truth is – if a business is doing well it should theoretically be very difficult for an owner to part with. Ideally, there will be a very credible reason for selling, such as owner illness or retirement. Be cautious of the rundown business that appears to be starving to death. The seller’s story of siphoning off gobs of unreported profits to fund his grandmother’s battle with illness might be true; it’s equally possible that the business is showing signs of going broke. Your job is to learn why the business is for sale and make sure you can live with any problems you buy with the deal.

2) Get copies of historical financial statements.
If the seller won’t provide you with credible financial statements, be prepared to walk away. It is normal for the seller to require that you to sign a non-disclosure agreement before turning financial documents over to you, but any resistance beyond that should raise your suspicions. Unless you are experienced at reading financials, have a trusted professional interpret them for you. Consider involving your banker, an accountant or a business analyst. At a minimum, you will want to determine whether the business can meet your financial goals, including any salary, loan repayment or return on investment expectations.

3) Review all legal relationships and documents.
This is a time a place to involve a lawyer. This is an area where some discretion will be necessary. Business owners may not want you to rock the boat by asking questions of customers, suppliers and key contacts. You are well within your rights to request a few references; call them and listen. Determine whether customers will continue do business with you. Review all existing contracts. A long-term or multi-year contract can add value to the deal, unless it binds you to a Darth Vadar.

A lot of opportunities will arise over the next few years, as many current business owners reach retirement age. Just as we are experiencing a shortage of skilled labourers, there will also be a strong demand for enthusiastic new business owners to step up and take the reigns as owners retire. You could be one of these.

The bottom line on buying a business – unless the deal is small enough to fund without risk, bring your accountant, your lawyer and a very sharp pencil.