Starting a new venture by buying an existing business is very exciting! While it’s exciting, there are various things to consider before you sign that dotted line. If you’re interested in buying a business but don’t know where to start, check out these four factors to consider before buying a business.
Business Valuation
You need to determine the fair market value of the business you’re interested in. It’s best to hire a certified business valuator to understand the company’s value objectively. There are three valuation methods that a valuator may use:
- Earning-Based Method: This method is most commonly used for businesses that generate considerable returns and value greater than their assets alone. A valuator will review past results and determine potential future cash flow earnings.
- Market-Based Method: This method determines a business’s value based on revenue and what is referred to as EBITDA (earnings before interest, taxes, depreciation, and amortization). The specific figure used and the type of ratio will vary depending on factors such as industry type, company size, market conditions, and multiples used by comparable businesses.
- Asset-Based Method: This method is typically used for companies whose value is asset-related rather than operations-related, such as those in real estate.
Company Assets
Appraising company assets is part of determining a company’s fair market value. A specialist’s appraisal may be needed for assets such as real estate, major equipment, or specialized inventory. You should be supplied with a detailed list of what is up for sale.
When assessing company equipment:
Make sure you get a detailed list of equipment up for sale and details such as:
- A record of how well the machinery is working
- Maintenance schedules
- Dates of purchase
- Model numbers
- Warranty details
When appraising inventory:
- Check the age and condition of the stock
- Ask if any of these items are obsolete
- Ask if perishable items are within their best-before date
When assessing accounts receivable:
- Determine how likely it is the amounts owed will be repaid
- Check the age of the receivables and whether they are collectible
- Ask whether adequate provisions have been made for bad debts and if there are disputes.
Due Diligence
Perform comprehensive due diligence to evaluate the business’s financial, legal, operational, and regulatory aspects. You must assess its financial statements, legal status, including inventory, equipment, and accounts receivable. Get a detailed list of exactly what you’re being sold, including land, buildings, equipment, inventory, the business name, customer list, employee and supplier contracts, and prepaid expenses.
You must also consider any changes you intend to make after acquiring the business. No matter how necessary these changes may be, keep in mind that their cost may substantially reduce the return on the capital invested. Determine the soundness of the business. If only a few customers generate the most sales, confirm that they intend to do business with the company once you acquire it.
Liabilities
Consult legal counsel to ensure compliance with local, state, and federal regulations. Assess potential liabilities such as legal issues, pending lawsuits, or intellectual property concerns that may affect the business’s operations or reputation.
Depending on the nature of the assets, a company’s loans or unpaid liabilities may become your responsibility as a buyer. A previous lender might even be able to seize the company’s assets as repayment for an outstanding loan, leaving you with nothing. You also need to know if the company has signed any agreements that might lower the value of the assets or limit your freedom of action.
Need a Las Vegas business attorney?
Our excellently qualified team of business attorneys at Michaelson Law can guide you through buying an existing business. The above factors are only the tip of the iceberg when buying a business, so let us help make the process for you less stressful. We also help form organizations, develop contracts, strategic planning, and succession planning. Give Michaelson Law a call today!
