Step-by-step guide to investing in a business

Buying and making a business your own can be a challenging and exciting endeavour. There are many considerations you need to bear in mind while buying a business or franchise. Since there are many factors which influence success of a business, it can be confusing to prioritize which item you should take care of first. Staying organized about your priorities can greatly reduce your worries and help you stay on track. When starting a business make sure you get a good lawyer like https://www.dhillonlaw.com against theft trade. To make your task easier, here is a checklist of things to keep in mind prior to buying a business:

  1. Nature of the organisation: The first steps involve performing a thorough assessment of the business and determining whether it is good fit for you.
  • Confirm business fit with your aspirations- Look into the organisation closely and see whether at face value it suits you and your goals.
  • Perform thorough analysis of the organisation- This is the most important step. Perform research about the organisation and the seller. Find out why the current owner is selling the business. If it’s due to changes in the market or other regulations, then it might be a risky investment for you. Also, ensure that the business is in good standing by checking the following items:
    • Articles of incorporation
    • Bylaws
    • Certificate of good standing
    • Copies of all agreements
    • List of shareholders and the number of shares held by each
    • List of places where the company can do business
    • List of areas where the company owns or leases property, maintains employees, and engages in business.
  • Identify opportunities- Locate any growth opportunities for the business and develop a plan for how you can tap into them for scaling your business.

2. Financial aspects: Plan to assess multiple financial components before choosing to invest in a business. Here is a list of items that you should explore-

  • Company assets: Get a list of assets being sold or leased. Verify their condition and see if they are in compliance with regulations pertaining to occupational health and safety.
  • Audited financial statements for three years and auditor’s reports
  • Company’s credit report
  • Capital budgets, projections, and strategic plans
  • Intellectual property: Verify ownership of all intellectual property such as brand names, logos, patents, trademarks, etc.
  • Auditor’s letters and replies for the last five years
  • Analyst reports
  • Inventory schedule
  • Accounts receivable schedule
  • Description of depreciation and amortization methods
  • Expense analysis
  • Stock: Check whether existing stock includes old and unsaleable goods.
  • Contracts, licences, and permits: Talk to relevant personnel regarding obtaining permits and licences for your business and the premises. See whether these are transferable.
  • List of fixed and variable expenses
  • Analysis of gross margins
  • Details about the company’s internal control procedures

3. Legal aspects: Find what legal structure the company was built under. When you invest in a business entity, you are purchasing the entity as it is whether it is a corporation or something else. You will also be purchasing everything which comes with that entity such as debts, contracts, etc. Going over material contracts with your attorney can help identify these components. Material contracts typically include:

  • Loan agreements, bank financing arrangements, line of credit, etc.
  • List of partnership, subsidiary, or joint venture obligations and relationships including copies of relevant agreements.
  • Copies of contracts between the company and officers, shareholders or affiliates.
  • Security agreements, collateral pledges, mortgages, indentures, and similar types of agreements.
  • Instalment sale agreements.
  • Guarantees to which the company is a party.
  • Marketing agreements, distribution agreements, sales representative agreements, etc.
  • Contracts, letters of intent, closing transcripts from acquisitions, mergers or divestitures from the last five years.
  • A standard quote, invoice, purchase order, and warranty forms from the company.
  • Any other material contract.

Also consider the draft Contract of Sale which should include comprehensive warranties like when the deposit amount is due. See whether it consists of a restraint of trade clause that binds the vendor and its directors to not compete with each other for a certain period of time.

4. Client history: Learn more about the company’s previous customers by gathering pertinent information. Here are a few aspects you might consider learning about:

  • A list of the company’s ten clients who were responsible for the largest sales. Also, a description of sales strategies adopted and executed over the last two years.
  • List of unfilled orders
  • Copy of the company’s credit policy
  • Copy of the company’s purchasing policy
  • List of customers lost in the last five years
  • Market research information relevant to current offerings
  • List of biggest competitors

In addition to the above, consider having business insurance to secure your investment from financial uncertainties. Visit this website to learn more.

Sources:

2011, Buying A Business – Due Diligence Checklist, Westmoreland, viewed 23 January 2021, <https://westmoreland.score.org/resource/buying-business-due-diligence-checklist>

2020, Checklist for Buying a Business, Seek Business, viewed 23 January 2021, <https://www.seekbusiness.com.au/business-resources/checklist-for-buying-a-business

Lesonsky, Rieva 2018, Buying a Business Checklist, CorpNet, viewed 23 January 2021,

<https://www.corpnet.com/blog/buying-a-business-checklist/>

 

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