Buying an existing business is a great alternative to starting one from scratch, if you aspire to run your own company. It can provide a faster way to profits, since the previous owner has already done the work of building and establishing the business. For this reason, it can also be a larger investment than starting from scratch. When it comes to any large investment, you need to do your research to know what you’re getting into. It is the buyer’s responsibility to verify all information about the business and see to it that any existing problems are addressed.

Financial Documents and Information

Most small business financial statements have been compiled by the seller, not a third party. If they have not been audited by a certified public accountant, make sure they are, even if it is at your own expense. You should obtain audited statements for the last 3 years and have your accountant corroborate the information in them. Your goal is to make sure everything is explained in detail, including the seller’s discretionary earnings (SDE) and cash flow. Make sure the following financial documents are included:

• Tax returns
• Income statements, cash flow statements, balance sheets, general ledger
• Company’s credit report
• Schedule of accounts payable and receivable
• List of all debts and their terms
• Inventory of all products, equipment and real estate
• List of all fixed and variable expenses
• Analysis of gross profit margins

Business Operations and Organization

In this step, you will need to take an in-depth look into how the business is being run. Gather information about the competition, market penetration and trends. Compare prices, products and services offered to other businesses within the same industry. Seek to know everything about the ins and outs of daily operations, the business model, customers and operational costs. All of this is to help you determine the business’s future growth and earnings potential. Be sure to review the following:

• Articles of incorporation and amendments
• Bylaws and amendments
• Organizational chart
• List of directors, shareholders and other governing groups
• List of shareholders and the number of shares owned by each
• List of company names and trademarks
• List of states, provinces or countries where the company is authorized to do business
• Business compliance requirements
• Alternate names, brand names and copies of associated registrations
• Operations manual
• Existing products or services and those under development
• List of outside accounting firms, law firms consulting agencies, contractors or other agencies doing business with the company

Employees and Benefits

Besides an organizational chart, you will need to know the key employees in the business, as well as their responsibilities. Try to find out which employees plan on staying with the company after the change in ownership and which may be planning to leave. Plan on offering an incentive to those who want to stay. Key staff members can be critical to your transition into ownership and ensure that business resumes as usual. Verify the following employee information:

• List of employees, positions, salaries and bonuses
• Employment, consulting, nondisclosure, nonsolicitation or noncompetition agreements
• A schedule of all employee benefits, holiday, vacation and sick leave policies
• Worker’s compensation and unemployment claim history
• Summary of all retirement plan information
• Description of employee problems or grievances

Customer Information

Review all customer lists or databases. Find out how new customers are obtained, and how they are kept. Are they on contracts? Are they offered incentives? Who are the target customers of the business and are there plans to grow the customer base? Who are the company’s biggest customers? These are all very important questions to get answers to. It may be a red flag if the business’s success is too dependent on a small group of customers. Ideally you would want to buy a business that has a large, diverse and growing customer base. Some detailed information about the customers will include:

• Customer research data
• List of the company’s largest customers in terms of sales
• Service or supply agreements
• Information about surveys or market research
• Detailed information about advertising or marketing programs
• Description of purchasing and refund policies

Material Contracts

Find out what agreements are in place between the company you are purchasing and other companies, individuals, vendors, or lenders. You need to know if there are any contractual obligations in place that you will be expected to comply with. Contracts can come in many different forms and can be with many different types of entities. Look for the following:

• Copies of agreements of all partnerships or joint ventures detailing obligations
• Contracts between the company and any shareholders, officers or directors
• Loan agreements, financing agreements, lines of credit or promissory notes
• Security agreements, mortgages, indentures or collateral pledges
• Non-disclosure or non-compete agreements
• Guarantees to which the company is a party
• Stock purchase agreements
• Installment sales agreements
• Letters of intent, contracts, closing transcripts from mergers, acquisitions or divestitures

Real Estate and Physical Assets

Obtain a complete inventory of all company owned real estate and its current market value. Include all vehicles, equipment, inventory and any other physical assets. Even a failing company can have tremendous value in its tangible assets. Make sure you get what you are paying for by verifying an itemized list of everything and its corresponding value. This includes:

• Real estate, office locations, leases, deeds, mortgages, title policies, surveys, zoning approvals, variances or use permits
• Product inventory, furniture, fixtures and equipment
• Company vehicles

Intellectual Property

Review and verify all trademarks, copyrights, patents or other exclusive intellectual property owned by the company, both foreign and domestic. This can include documentation on trade-secrets, or a specialized business processes or operational procedures. Review any work-for-hire agreements, methods to protect trade secrets, consulting agreements or information about any technical know-how. In many cases, intellectual property can add significant value to a business, so make sure every bit of it is well documented and proven. Verify each of these items:

• Patents and patent applications (foreign and domestic)
• Trademarks and trademark names
• Copyrights
• Documentation of trade secrets or specialized processes
• Licenses or assignments of intellectual property to or from the company
• Claims or threatened claims regarding intellectual property by or against the company

Legal Issues

Avoid becoming entangled with legal problems or obligations that were the responsibility of the previous owner. Find out what law firm represents the company and if it has proper insurance, licenses and permits in place. Press for information about any past, current or pending litigation. For any settled disputes, obtain documentation that legal obligations have been satisfied. Obtain the following:

• List of all pending or threatened litigation
• Copies of insurance policies, licenses and permits
• List of satisfied judgements
• Any injunctions, consent decrees, or settlements involving the company

You might have already found what seems like a perfect business, but a look behind the scenes can reveal many issues that can cost you money, hinder the company’s growth, or result in future legal problems. By doing your due diligence you will ensure that you know everything there is to know about the business you are preparing to purchase and verifying that it is worth what you are paying for it. If this seems like a huge task, it’s because it is. Getting the help of a 3^rd party, such as an experienced business broker, can help you find the information you are looking for a lot faster.

If you are looking to purchase an existing, proven business in Florida, contact Corportate Investment Business Brokers (CIBB). We can help connect you with a successful business in the industry of your choice. Check out our latest business listings to find the right opportunity for you.