What to Investigate Before You Buy a Business
by
Attorney Fred S. Steingold
Take these steps to make sure the business is a good investment.
Some call it “due diligence.” I call it “common sense.” It’s the idea that before you buy a business, you need to know what you’re getting into.
Buying a business can be a fantastic opportunity -- or a disaster waiting to happen. You should X-ray a business to detect any hidden problems, by asking for the right information and paperwork. Some information, such as the extent of equipment liens, will be available from public sources. For other information, your main source will be the owner of the business.
 Be ready to sign a confidentiality agreement. This assures the owner that you’ll use the information only to check out the business. Just make sure the agreement lets you share the information with your lawyer and accountant.
Learn About the Business Finances
Step one in your due diligence is learning all you can about the financial condition of the business. Check out documents like the current balance sheet, profit and loss statements (past 5 years'), tax returns (for income, unemployment, and sales tax, for the past 5 years), audited financial statements, accounts payable and receivable, and more.
You also need a list of business debts -- and information on whether the creditors have a security interest (lien) on any business assets. You or your lawyer can double check on liens at the public office where liens are filed. If you find that banks, suppliers, or other creditors filed what's called a UCC-1 form when they extended credit to the business, realize that if their debts weren’t paid, they can seize and sell the secured assets, even if you're now the owner.
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