Due Diligence for Buying a Business - Part 2

Due Diligence for Buying a Business – Part 2

When working through a business broker to buy a business the due diligence process should be more efficient than when working on an acquisition without a business broker involved.
In Part 1 we talked about doing due diligence for the Sales Tax issues. Now in Part 2 we’ll talk about the business income tax return issues.

When conducting due diligence to buy a business we talked about “trust but verify”. Income tax returns are no different. In most cases the seller will provide the business buyer with tax returns for the business. The assumption is that the tax returns accurately reflect the results of the business operations, right? Well, sometimes they do and sometimes they don’t. However, your first step at this point is to ask the seller to sign an IRS Form 4506. This will allow you to get a copy of the tax return the seller actually filed with the IRS. The vast majority of the time the returns you received from the seller and the returns the IRS has are the same, sometimes they aren’t. If they aren’t the same there needs to be a really, really good reason.

If the seller was just trying to deceive you…run for the hills and find another business to buy from a seller that’s less deceptive. And don’t forget to tell the business broker, he will no doubt be just as surprised as you are.

A Business Buyer’s Guide to Working with a Business Broker

When looking to buy a business often the business seller has retained a business broker to represent the seller, locate a buyer, assist with negotiations, guide the due diligence efforts and coordinate the closing process.

If you are seriously trying to find a business to buy you will come in contact with a business broker at some point. Here are some tips that might help you:

  • Make sure you know who the broker represents and get it in writing. In small business sales it is most common for the broker to represent the seller (but the broker still usually has a duty to treat you fairly and honestly). Know the standard the broker is working under.
  • Even though the business broker may represent the seller don’t automatically assume he/she is your enemy
  • If you don’t feel like the broker is treating you fairly and honestly…go somewhere else.
  • Make sure you understand the source of any information provided to you by the business broker. Did the seller generate the info? Accountant? Broker? Always ask.
  • When you receive information live by the old saying “Trust but verify.” If there is a reluctance to allow you to verify certain information… that should be a warning sign.
  • Move deliberately through the process but at a decent pace… time kills deals. A fast no is better than a slow maybe.
  • Be responsive to all parties, return calls promptly, check your emails, etc. If you are not interested that’s fine, tell the broker and move on, but don’t just go “radio silent” without advising the parties that you have lost interest.
  • Finally, treat all information received as confidential, do not try to get cute with this. I’ve seen many buyers get themselves into a pinch because they failed to comply with confidentiality agreements. Immediately return to the business broker any information requested that is bound by the confidentiality agreement you sign.

Buying a business is a grind but the rewards are great for those who can get through the process with thoroughness while maintaining the goodwill of all the parties.

Find a job or buy a business… a choice worth investigating.

Buying a business could help you achieve your retirement goals. Today’s economic problems have changed the future for many people who thought they had a job for life (or at least a job until they decided not to have a job). In times like these, finding a new job is not only difficult but maybe even unwise.
Have you thought about buying a job? You can if you buy a business…..but you’re thinking “oh, but it’s so risky”… I doubt it’s any riskier than going to work one day and getting fired because some idiot in New York bet that oil prices would go up forever or bet that people who took out mortgages they couldn’t afford would some how hit the Lotto so they could make the payments.
What’s the risk in owning your own business? First you might ask… are you smart enough to run it? In my experience with thousands of business owners I can tell you, I.Q. and education have very little to do with success.
Why do small businesses succeed? Because the owners understand what it takes to get people to pay for the product or service they provide. It’s not rocket science.
But you say, with the economy so bad nobody is spending money. Wrong, the economy looks like it will be down about 5 % in this last quarter of 2008. Guess what that means? 95% of the money spent last year is still being spent. Have you stopped spending money on EVERYTHING? Electricity? Food? Toothpaste? Beer? Gas? Internet? …..you get the idea.
Just look around your neighborhood. Even in this economy you will see many, many businesses whose owners are doing a lot better than an unemployed person who used to have a job.
What does it take to buy a business? Here’s simple formula that can give you a general idea of the financial requirements of a business purchase:
Whatever salary you want to replace, you should have about that much money for a down payment. If you want to replace a $50,000 per year salary, you need about $50,000 for a down payment…. $100k salary…need about $100k down payment, etc.
Where do you get the down payment? There is a tax break for you! You can use money in 401(k) or I.R.A. to fund the down payment (see CPA or got to www.borsaplan.com) with no penalty or taxes for withdrawal.
But you say “that’s my retirement money!”. First it won’t be if you need to withdrawal it to live on and secondly you have no idea if it will increase in value over time.
If you own a small business that could be your retirement..SELLING IT. In fact you are likely to buy the business who is retiring!
Where do you find a business to buy near where you live? First you can check www.sunbeltnetwork.com. There are other business brokers out there but Sunbelt is the biggest with about 250 offices in the U.S.
While you’re worried about finding a job, also spend some time worrying about how you can gain the security of owning your own business. I do and you can to.