The process of buying- an ex isting business can b-e bro ken down into two de nitive steps. A prospective buyer must verify the nancial picture of the business, its past and present. This is either done by the buyer or his or her trusty accountant.
Upon completion of a- com prehensive review of the past and present nancial picture, -the pro spective buyer must examine the future nancial picture an-d con clude whether or not the business can or will do the same or better revenue for the new owner.
Although a nancial review is very important step, there is an equally important step in- deter mining whether or not th- e busi ness is strong, healthy and ripe for the picking. Most buyers focus on the numbers and the owners bene t and forget to look behind the numbers.
Looking behind the numbers is to request and review the things that make the company function in any and all ways. The questions are many but if answered- respon sibly and thoroughly it will ensure a smooth transition from seller to buyer.
How does the busines-s gener ate revenue? Who are its -custom ers? Are there agreements with its customers? Are they long-term or short-term agreements? Are any of those agreements in jeopardy or expiring? Is a majority of the business coming from a f-ew cus tomers as opposed to many? What happens if that main customer decides to go somewhere else with their business? What about the suppliers who supply product? Is there one main supplier? What are the terms and conditions with that supplier?
What happens if that supplier goes out of business or decides to cut o the business? Are there backup suppliers? Who else does -the busi ness depend on for its products or services?
What about the employees who are part of the day-to-da-y opera tions. Are there special licenses required to operate the business? Who holds them? Are th-ose em ployees under employme-nt agree ments or can they pick up and leave at any time? What are the terms of those agreements? What happens if one or more e- mploy ees leave? Are you able to hire and train new employees at- a mo ments notice? Can you continue to a ord the labor even if you may need to add some debt on the business?
These types of questions are what I call part of the legal due diligence process. It is extremely important to work with a-n attor ney or a well-quali ed business consultant to review thes-e specif ics behind the numbers and make sure that the business is on solid footing and not just a house of cards waiting to fall.
A solid business is one that will continue to operate, grow- , gener ate revenue and not be a ected by sudden movements, good or bad, by vendors, customers, suppliers, or employees. Things hap-pen ev ery day to businesses, but it is the nesses that will thrive in a-ny mar ket. More importantly, it is worth your time and e ort to make sure that your target acquisition is able to stand on its own two feet even if a curve ball is thrown it way.
Smart businessmen and- wom en are always checking every part of their operations to ensure that no one factor alone will have a detrimental e ect on the entire business. If you dont see through the nancial snapshot and look behind the numbers, you might nd yourself wishing you did when an unexpected action walks in the door and leaves you, the new owner, wondering what hit you and what happened to the business.
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