Many people dream of owning their own business, and they just assume they have to start it
from scratch. The reality is that starting a business from scratch can be risky.
Buying an existing business can be faster, cheaper and safer than starting a business. But buying a business has its own risks. The good news is that most of these risks can be reduced if you know how to do it.
Below is a step-by-step checklist for the “due diligence” process on buying an existing business.
Initial Review
As you look at a business, you need to review the information and determine if it is the right fit
for you. Take a look at the business and its history and its operations. Determine how much the
business is worth. Review its assets, its financials, and its potential.
While financial statements don’t tell everything about a business, they are a good place to start.
Balance Sheet
The balance sheet shows, at a given point of time, the position of the business: what it owns
and what it owes (and the difference between the two, which is its net worth, or net equity.)
The typical things on a balance sheet, and what you need to review are:
Assets
Cash (typically not sold with a company)
Accounts Receivable (if you are purchasing then)
Inventory
Machinery and Equipment
Furniture & Fixtures
Real Estate (if included)
Liabilities
Accounts Payable (if assumed)
Notes Payable and Mortgages Payable (if assumed)
Income Statement
The income statement shows the profitability of a business over a period of time (monthly,
quarterly, or yearly). The profit and loss statements for the past 3 to 5 years should be reviewed,
and attention must be paid not only to the profit, but also to the owner’s salary, fringe benefits,
non-cash expenses, and one-time expenses. Some time should be taken to review normal
financial ratios (eg gross margin, net margin, etc.), and other key issues. Specific items to be
reviewed will be:
Discretionary Costs / Perks & benefits
Financial Ratios