Four key considerations to scrutinize before buying any business

On Behalf of | Sep 8, 2021 | business law, purchase and sale agreements | 0 comments

The investment put into the purchase of any business is always substantial, whether it’s time or money or both. Unfortunately, some entrepreneurs end up getting burned because they brought an enterprise without conducting proper due diligence.  If you are considering purchasing a business, examining aspects to the property before you sign any documents is vital to avoiding problems post-sale.

There are countless issues that should be examined, but each entity differs. Entrepreneur, an online source for all things business, discusses four different areas that new business owners should always review and analyze.

1. The reason for the sale

Business owners should always know why the previous owner is selling. It could be that the owner is simply looking to retire or wishes to embark on a different venture. However, there could be more arduous reasons for the listing.

Perhaps the business is not really profiting or was involved in a bankruptcy in recent months or years. Perhaps the business is the subject of court litigation. Looking at the current owner’s intent can play a huge part in determining whether buyers will want to take over ownership.

2. Business income reports

Some entrepreneurs have little concern about existing income revenue for an entity they want to buy. Perhaps they plan to change the business model post-sale and have hopes that such changes will positively impact the entity’s revenue stream. However, for buyers who plan to make minimal changes after taking over the enterprise, examining monthly and yearly income reports in thorough detail in order to get a grasp on revenue should be a top priority.

3. Business debt

Many businesses carry debt but the type of debt a business has it always worth examining. Entrepreneurs planning to purchase a business should always investigate the reasons behind the debt of the operation, as it could potentially place the business at risk of default or even bankruptcy in the future.

4. Condition of the property

The financial aspects of a business are important, but so too is the physical state of a brick and mortar operation. What is the condition of the building itself? Is the equipment old or obsolete? Buyers should always look at whether a substantial monetary commitment will be needed to upgrade the equipment or make significant exterior repairs.

The above are basic considerations; there are always additional, minute details every entrepreneur should consider before investing in any existing business. Reaching out to a commercial real estate lawyer who can ensure that proper due diligence is conducted is advised.