Are you interested in buying an existing business? Then, you are making the most crucial decision in your life. You are taking the first step to become an entrepreneur without starting an entirely new business from scratch. Research says that every year 500,000 businesses are sold and bought. The number will increase in the coming years as millions of business owners will retire and sell their businesses.
Buying an existing business is a popular option because it eliminates the pain and complexity of starting a business from scratch. However, buying an existing business can be long and complicated. What can help to make the procedure less sophisticated? Ensuring that you have all essential information on hand is one way to lessen the complexity of buying the existing business.
Bowarr Management LDC has curated a professional 5-point checklist you need to have before buying a business. Visit our blog section to know more about that topic. This blog will outline a list of all permits and licenses that the seller company should have. That way, you can seamlessly decide whether you are buying a legitimate business or not.
Business Licenses and Permits to Watch-Out For
- Organizational Paperwork and Certificate Of Good Standing
If the business you are interested in buying is a sole proprietorship or partnership, there is little probability of finding the “founding” paperwork. However, if the business you want to buy is a registered business entity such as a Corporation or an LLC, then there will be organizational documents with the local authorities. Such as license, certificate of incorporation, trade license with valid date, Memorandum and article of association, share certificate/s.
What is meant by a Certificate Of Good Standing? It is an essential document that certifies that the business is approved to operate in the country or the specific location. The government authorities should be able to produce that certificate.
- Zoning Laws
Check with the local zoning laws and ensure that the business you are interested in buying is not violating any of them. Why is this important? Some local authorities allow a combined use of commercial and residential spaces. However, some authorities consider few locations as exclusive residential zones. Business entities registered into one zone cannot operate from another zones or from main land. Hence, double-check whether the seller company complies with the local zoning laws.
- Environmental Regulations
If the business you are interested in buying deals with consumer products, manufacturing, chemical usage, Pharmaceuticals, and likewise, ensure that it is complying with all the environmental regulations and laws. What does that mean? Is the company secretly dumping chemical waste into local water bodies? Is it polluting a nearby reservoir? Is the pollution index within the limit? If the answer is “No”, then it’s your cue to back off from the deal. Double-check that the seller company complies with the local environmental laws and regulations for businesses.
- Letter of Intent
Also called an LOI, a Letter Of Intent is an agreement between the buyer and the seller. It includes the price point that both of them have agreed upon and lists the assets and liabilities which are a part of the transaction.
The seller’s LOI should include the price proposal and the terms and conditions of the transaction. This document ensures that both the buyer and seller are on the same page of the deal and will make the due diligence process easier.
- Contracts and Leases
Before closing the deal, consider the Lease agreements of equipment, property, or other assets. Why? Because ceratin lease agreements can become a costly expense in the long run. Hence, review all lease agreements in advance. Also, check for contracts that the company has made with certain clients, vendors, or manufacturers. For example, if 90% of the company’s revenue is dependent on a single vendor, then it is not an ideal business for purchase. Why? Because if that vendor decides to part ways, then it will mean havoc for the company.
- Business Financials
Ensure that you have access to all documents concerning the financial aspects of a business. What are they? Consider the following:
- Tax Returns
- Balance Sheets
- Cash Flow Statements
- Sales Records and Accounts Receivable
- Accounts Payable
- Debt Disclosures
- Advertising and Marketing Expenses
Don’t just go through the documents that outline information for a few months. Rather, check all information pertaining to the past few years.
- Organizational Charts
The organizational chart should include valid details like management practises, processes, benefit plans, employee compensation data, insurance, vacation policies, etc.
- Equipment, Building, Furniture Inventory Status
You should examine the following:
- Current possessions
- The quality
- How sellable they are in terms of the working condition and the market rate
- How well they are maintained and the need for repairs
- Whether they are still of use or they need to be replaced for operational or design and ambience reasons
- Whether they need some modifications- like change in colour, texture, etc.
- Other important Documents
Ask the seller for other important documents that include the following:
- Equipment and asset listing
- Brand assets for advertising and marketing
- Insurance coverage
- Account of intellectual property assets
- Employee policies and contracts
- Tangible assets
- Intangible assets
- Customer lists
What will help you to ensure that you have all documents checked?
A simple answer to that question is the due diligence process. Analyzing documents is the job of a professional. Lawyers, business professionals, financial advisors, accountants, consultants, etc will help you in ensuring that all essential documents have been accounted for. Due diligence is the single most important way to ensure that you are investing in the right company.
Bowarr Management LTD has one of the best professionals that will help you to choose the perfect business for you to take over. We help people in deciding the best deal during business acquisition and also provide expert diligence assistance. Get in touch with us soon to know more.