Basics of Buying a Business

Buying an existing business can be a much less risky and more quickly profitable venture than starting your own business from scratch. But it's not entirely risk free and your success will depend heavily on how wisely you choose and evaluate the business you buy.

IFC recommends that these are "tires to kick" as you begin investigating a prospective business purchase. These items are not meant to substitute for an in-depth evaluation - which you will want to conduct once you've gone through this first step. Click on the item below to learn more about what you should be looking at.

Financial statements
Payables and receivables
Registration, licenses, zoning
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Financial Statements

Look at both financial statements and tax returns from the past 3-5 years to judge both the current fiscal health and financial trends. Make sure you see figures that are accompanied by an audit letter from a reputable CPA firm. Don't accept a simple financial review or a compilation, because those are based on figures supplied by the company. Is the business in sound financial condition? Do financial statements match tax returns? Are sales and operating ratios in line with the industry average? Your accountant can help you analyze these figures to determine the net worth of your company.

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Payables and receivables

Check the dates on invoices to see the business is keeping up with its bills. Normal payment times vary from industry to industry, but generally 30 to 60 days is standard. If bills are being paid 90 or more days past the invoice date, the owner may be struggling with cash flow. Also find out whether any liens have been placed against the business because of unpaid bills.

Inspect the accounts receivable with a skeptical eye; often their stated value is somewhat inflated. Take a close look at the dates on them to determine how many are delinquent and by how long. This is important because the older the receivable, the lower its value and the greater the chance that it will never be paid. While you're at it, make a list of the business's top ten accounts and run a credit check on them. If the majority of customers or clients are creditworthy but late to pay, you may be able to solve the problem with a more rigorous collections policy. If the clientele is financially unstable, start looking for another business.

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Registrations, licenses, zoning

Make sure that key business licenses and other legal documents can be easily transferred. Determine what the process for transfer would be, and what it would cost, by contacting the proper state and local authorities. If a company is a corporation, what state is it incorporated in? Is it operating as a foreign corporation in its home state?

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How a company is perceived can be a serious asset or a liability that can't be judged from a balance sheet. There are a wide range of intangibles that you need to consider when you're evaluating a company -- everything from the way it services its customers to how it answers the phones to whether or not it supports the community or the industry. This category is often referred to as "goodwill." Talk to customers, suppliers, competitors, banks, and owners of other businesses in the area to learn more about this firm's reputation. Remember that it is very difficult to change a negative perception.

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Learn More About: Employees, Customers, Location, Appearance of facilities and Competitors