Buying A Business Checklist

Checklist For Buying A Business

 

The following buying a business checklist is in two sections;

 

The first section is a common or general checklist.

 

The second section is a more specific list for digging deeper into larger and more sophisticated business.

 

CHECKLIST

Copies of the business' financial accounts i.e.

 

Trading and Profit & Loss Accounts; and  Balance Sheets   for the last five years.

 

Copies of personal and business income tax returns for the last five years.

 

Copies of the business’ Aged Debtors' Analysis.  - Note in particular the percentage of Debtors that have been outstanding for more than 60 and 90 days.

 

Access to:

 

• Cash Payments Book
• Cash Receipts Book
• Tax Invoice Books
• Journals
• Bank Statements
• Bank Deposit Books
• Ledgers
• Creditors Tax Invoices
• Creditors' Aged Analysis
• Stock Records
• Work In Progress Records
• Wages Records
• Order Book
• Lease Agreements
• Business Activity Statements

 

Ascertain whether the Vendor is operating similar businesses elsewhere, however only selling one.

 

If this is the case:

 

Check purchases, sales and wages to ensure that they relate only to the business that you are acquiring.
Determine what Restraint of Trade the Vendor is prepared to enter into.

 

Consider whether all present customers will remain with this business or follow the present owner to his/her new or continuing business.

 

Examine the stock of the business:

 

• Is it obviously old?
• Enquire of the stock turnover.
• How does this compare to inter-firm comparison benchmarks?
• How will the stock be valued?
• Establish the history of the business.

 

Establish what percentage of the market the business has.

 

List the major competitors:

 

• What is their present position?
• What is their likely future?
• What are their reasons for success or failure?
• What are their strengths and weaknesses?
• Do you believe that you can compete with them?
• Have you developed a strategy?

 

List the major suppliers

 

Enquire as to the suppliers' terms of trade.

 

It is recommended that you contact the suppliers to ascertain their intentions.

 

 - Will they supply you?
 - On what terms?

 

Enquire as to the business’ terms of trade with its customers.

 

Check whether they are enforced.

 

Ascertain whether the business promptly renders its:

 

 - Tax Invoices
 - Monthly Debtors' Statements

 

Does the business follow-up payment by debtors?

 

Check the plant and equipment owned by the business.

 

Is it modern?

 

If you don't have the necessary expertise to carry out these checks, insist on an inspection (as part of the contract) by a qualified person prior to settlement.

 

Enquire as to whether the plant is:

 

• owned
• on hire purchase
• leased

 

If the business is operated from leased premises - obtain a copy of the Lease Agreement.

 

Has the business owner the right to negotiate for the transfer of the lease?

 

You should have discussions with the landlord and obtain the landlord's written approval for the transfer of the lease.

 

Examine the terms of the lease and particularly note the clauses discussing:

 

 - The removal of fixtures and fittings
 - Plant and equipment
 - Rectification of the premises
 - Option periods

 

The number of days prior to the expiration of the present lease period in which you have to give notice of exercising a right of an option.

 

How often the leased premises have to be painted?

 

Who pays for repairs and maintenance and refit requirements?

 

If the building is owned by the Vendor, is the building being sold?

 

If so, obtain details of the building's written down value (if it is eligible for tax deductible depreciation write-off).

 

Have a qualified person inspect the building to ascertain its condition.

 

You should note that repairs and maintenance carried out within 12 months of acquisition is normally not tax deductible.

 

In what name is the building registered?

 

Obtain details of the Title Deed.

 

Check with the Local Council as to the zoning for the premises.

 

Are there any restrictions on the type of business activities that can be carried out in the building?

 

Ascertain the price the owner wants for the business.
Ask what the apportionment is between land and buildings, plant, fixtures, motor vehicles, stock (if you are taking over) and goodwill.

 

If you are taking over debtors - beware!

 

Obtain full details of all debtors.

 

Obtain a detailed Debtors' Aged Analysis.

 

Never agree to pay 100 cents in the dollar for Debtors - or if you do, delay payment until you actually receive 100 cents in the dollar.

 

Determine which employees you will be retaining.

 

Ascertain their period of service.

 

Have a calculation prepared and an appropriate adjustment made for:

 

 - Holiday Pay
 - Sick Leave Entitlements
 - Redundancy Entitlements
 - Long Service Leave

 

If you are acquiring employees who have more than say five years service, have an adjustment made for Long Service Leave Entitlements that will accrue to them after ten years service with the business, not particularly with you.

 

Ensure that you are going to be given an accurate customer list for the business.

 

Together with details of sales made on an annual basis over the last five years.

 

Enquire as to the intentions of the Vendor.

 

 - What are they going to do after selling the business?
 - Have they any family members operating similar business in close proximity to this business?

 

 - Will the Vendor sign a Restrictive Covenant?

 

You should determine a reasonable period for the Restrictive Covenant and the penalty if the Vendor breaks the Restrictive Covenant.  You should talk to your solicitor about the wording of the Restrictive Covenant.

 

Will the Vendor stay on with you in the business for a reasonable period to introduce you to the existing customers and to assist in the business change-over?

 

Determine the method of valuing stock.  If possible, insert a clause that you do not have to acquire all the stock, but only the stock that you want.

 

Politics - is legislation likely to change, which will reduce the business activities -  or increase costs?   (Will this increase in taxes or changed policies have an adverse affect on the business?).

 

If gazetted trading hours change - will this adversely affect the profitability of the business?

 

• Are wages stable?
• Are wages likely to increase?
• Will the staff you are taking over be willing to work for you for the same rates and conditions as they did for the Vendor?

• What is the state of the economy?
• Have the last few years been boom years?
• What are the years ahead likely to be - boom or bust?
• How will that affect this business?
• Can you maintain the profitability?

 

Obtain from the Vendor a month by month schedule of sales made in the last five years.

 

Check whether any large Credit Notes were processed in July/August.   This could mean that annual sales to 30th June have been overstated.

 

Have a credit worthiness check run on the business.

 

Has there been legal action started by or against the Vendor?

 

Are there changes in social behaviour which could affect the business?   e.g. video affects on cinemas, weekend shopping.

 

 - Will changes in technology affect the business operations or the products or services being sold?

 

 - Are there any proposed changes in Town Planning Regulations which will affect the business?

 

It is recommended that you enquire at the Local Council.

 

• Who are the customers?
• Into what categories do the customers fit?
• Age?
• Sex?
• Education levels?
• Income?
• Ethnic Group?
• Occupation?
• Family structure etc?

 

Are you satisfied that you have the necessary skills, patience and temperament to service the customers of the business?

 

Is there likely to be any change in the customer mix over the next four years which could affect the operations of the business?

 

•  Have you reviewed the operation of the business?
•  Do you believe it is operating efficiently?
•  If you are proposing changes, have you calculated the realistic cost of these changes?
•  Have these costs been included in your list of capital requirements?
•  Do you intend to re-employ the present employees?

 

You should receive a list of their individual job specifications.

 

 - Review the work and responsibilities of each of them.

 

 - Effective Human Resources Management is vital for he success of every business.

 

 - Are you satisfied that you can work with this group of employees?

 

Examine the employment contracts of these employees - noting any particular clauses or agreements.

 

Alternatively, are you satisfied that you can hire the necessary employees required?

 

 - Does the business have the right product mix?

 

Have You Received full Details of the Sources Of:

 

• Product
• Procedures
• Recipes
• Formulas etc
• Does the business operate under any:
• Patents?
• Trademarks?
• Permission to produce under license?
• Copyrights etc?

 

As a condition of the contract the right to use will have to be transferred to you and the ultimate owner of the "right" will have to agree to the transfer.

 

Check the Order Book

 

Do forward orders exist?

 

Check the Gross Profit Margin on the orders - is the percentage similar to that which has been obtained in the past?

 

Contact some of the customers who have placed orders to ensure that they intend to proceed with the purchase.

 

If you are taking over partially completed contracts - check thoroughly that every thing is satisfactory and that you can complete the order profitably.

 

Obtain a copy of he Creditors' Aged Analysis.

 

 - What are the ages of the outstanding balances?
 - Does the Creditors' Analysis "line up" with the suppliers' terms of trade?

 

If not, enquire as to why not.  (A significant variation may mean that the business is not operating as well as stated).

 

Check the Bank Reconciliation Statement.

 

What is the age of unpresented cheques?
Have creditors' cheques been drawn merely to make the Creditors' Aged Analysis look satisfactory?
Quality Control - is there a system in place?

 

Find out what the stock buying pattern is for the business.

 

 - When do you have to order winter stock or summer stock?
 - Can you buy specific stock other than at those times?

 

If so, at what cost?

 

Has the business successfully implemented suitable systems and policies for GST?

 

If you are planning to acquire:

- shares in a company
 - units in a unit trust; or
 - an interest in a partnership

 

You need to first understand your own motives – is this purely an investment, or is it part of a broader lifestyle decision?

 

Inevitably it will impact on both, and you need to consider these implications when you look at what and how you invest and involve yourself.

 

This buying a business checklist is intended to provide some initial ‘thought prompts' – more detailed information and assistance should be sought from your business advisor.

 

Opportunity Assessment

 

Business Size

 

Are you buying a business or buying a job?   A business is large enough for an owner to be able to delegate to other employees so that the owner can have reasonable time away for holidays and business travel.

 

What market?

 

What market is the business in – usually defined by a combination of industry, geography and customers – and how big is that market?  Is the market growing or shrinking?

 

Market share: What share of the market does the business have, is that likely to change and in which direction?

 

How profitable?

 

Price sensitive: Which products/services generate the most revenue and how sensitive are the customers to price changes on these products/services.

 

Cost structure: What are the major costs associated with running the business, and how easy are they to control.

 

Fixed costs: What costs does the business incur regardless of the volume of sales? How significant are these costs, and what are the forward contract commitments (eg lease).

 

Variable costs: What cost does the business incur directly related to the volume of sales, and what is the unit profit margin.

 

How Risky?

 

Competitors: Who are the competitors? How many are there, and how good are they? Is this likely to change?

 

Complexity:

 

How complicated is the business. How difficult is it to run, and how difficult is it for a new entrant to set up in competition?

 

Variance

 

How reliable are the income streams and cost structures – do they have seasonal variance, are they significantly influenced by external factors (economic, weather, social trends).

 

Control: Who controls the business operation, ownership and strategic direction? How much control and influence will you have in these things?

 

 - How expensive?

 

Initial Investments:

 

How much money does the business require? How is this requirement calculated, and how much money is required from you.

 

Working Capital:

 

What does the business require for ongoing working capital – money required to run the business in between customer payments.

 

Cash Flow:

 

How strong and consistent is the business cash flow, what are the standard payment terms, quality of debtors, and size of baddebtors?

 

Maximum downside: What is the worst possible scenario and what steps can be taken to protect you, your name, reputation and your other investments from this.

 

Exit Strategy

 

Liquidity of assets: If you wanted to sell for an unexpected reason – how easy would it be to find a buyer at a reasonable price?

 

Restrictions on sale: If you wanted to sell your shares for whatever reason – could you?

 

Ownership Structure

 

What is the legal ownership structure and constitution?   Does it need to be altered?   Do you need to change the capital structure or ownership of the company to suit your family requirements?

 

Level of Responsibility

 

What will be your level of responsibility – are you capable (time/skill/experience) of doing this?

 

Level of Control

 

What control will you have over the business once you have acquired the business?

 

Role & Involvement

 

What will be your ongoing role, and related time commitment?   Will you be the CEO, Chairman, or both?

 

Level of Liability

 

What is your level of legal liability – eg are you a Director?

 

Skills Required In The Business

 

What skills are required in the business – who has them, and how easy are they to source if these people leave?

 

Quality of Management

 

Is there adequate senior management resource in the business?   Does it need additional Board members to assist you?

 

Lifestyle

 

Will buying the business at this time and in this way have a positive impact on your lifestyle for the period of your investment? If not– then is this really the right investment for you?

 

External Advice

 

Do you have the time and ability to answer all of these questions with confidence? Do you have ready access to people who can help?