Investigate these 7 Points When Buying a Business

Investigate these 7 Points When Buying a Business

Investigate these 7 Points When Buying a Business

Buying a business can be a great move but it takes a lot of due diligence investigation. Due diligence is often thought of as “finding the bad stuff” but it is also important so that you understand what it will take to operate the business after you own it. OJT (on the job training) is helpful but preparation is even better.

Buying a Business

Know what to research

Keep in mind that these magnificent 7 aren’t the only things you need to investigate but they are 7 that are often overlooked or short-changed when buying a business.

  1. Cash Cycle – understand the cash cycle from when you incur cost to when you collect cash. 10 days? 30 days? 60 days?  Think through the stages, when do you spend money? When do you collect money? Every business has a cash cycle, dissect the steps to make sure you understand when cash is expensed and when you receive cash. If you have 10% profit you have 90% you owe other people. You’ll need to fill the “cash gap” with financing or cash injections from other sources.
  2. Hidden Costs – know the “hidden” costs in the system, warranty, call backs, inventory losses, un-billable hours, and uncollected AR. Most business owners only think about these things at year end when the CPA does the business taxes but this effects your cash every day.
  3. Specialized Knowledge – know the specialized knowledge of the current owner. Technical knowledge? Craft knowledge? Relationship knowledge? Supply source knowledge? The employees will judge you beginning day 1. Make sure you know what they expect you to know.
  4. Cash Needs -know your cash per sales growth requirements; don’t grow yourself into poverty. For every dollar in sales you’ll need to have some dollars available to fund expenses and products until you collect the cash from the customer.
  5. Pricing – understand how the current owner prices products and services.  Markup? GM? Guesses? Competitive comparison?  Is there room for improvement? Does current pricing have anything to do with the market? Who has special deals?
  6. Insurance – understand the current insurance coverages and make sure your coverages reflect your risk tolerance levels. Get an insurance audit. Make sure you review every aspect of insurance you need. Often we find sellers are under insured. Getting proper insurance could effect the biz earnings and the amount you might be willing to pay to buy the business.
  7. Licenses – make sure you research the licenses, permits and compliance requirements needed to operate the business. Don’t assume the seller knows everything. Buying a business not in compliance with current requirements is risky business.

While you may be itching to simply sign on the dotted line..

Thinking about what businesses might be for sale?

STOP:  your preparation and due diligence will save you a great deal of  hassle and surprise. Buying a business takes time, thought and research. As an entrepreneur, this is just your first step in creating a successful business.

IT Due Diligence when you Buy a Business

IT Due Diligence when you Buy a Business

Intellectual Property Due Diligence (this includes information technology I.T.) when you buy a business is critical and often overlooked, along with the Intellectual Property element of Due Diligence.

I.T. and Intellectual Property (IP) Due diligence are closely related and both are often done at the same time. This process can be very technical and often involves complex federal law. If your attorney is not familiar with intellectual property law you might, dependinging on the value you assign to the intellectual property, want to seek an attorney or  Intellectual Property Due Diligence expert who specializes in these somewhat arcane issues.

I.T. & IP due diligence have some common elements and one of the most important is to make certain who actually owns the IP often associated with I.T. value in a business.

Note: To mitigate risk, “involve IT professionals as part of the deal team to help assess a broad overview of the IT landscape of the target firm and identify any substantive issues that may exist early in the deal making process.” John Beauford, director of IT at Doctors in Training.

The law related to ownership of Intellectual Property can be confusing. A common question is, when the business had it’s website developed does the business have written confirmation that the intellectual property (i.e., the website content and design) is owned and is the legal property of the business? Just because an employee did the work it doesn’t necessarily mean the business owns the IP. This is something to think about as a business owner regarless of if you are considering buying or selling a business.

Another area is IP related to Trademarks, Patents and Pending Patents all of these usually require third party confirmation or transfer.

If the IP and I.T. of a business is a significant part of the value of the business you are buying it’s probably a good idea to put in the time to investigate the issues and engage some legal expertise to make sure that you will own or have the rights to the IT/IP after you purchase the business.