Buying A Business Checklist
It is recommended that when purchasing a business, you request the following information from the Vendor:
1. Copies of the business' financial accounts i.e.
- Trading and Profit & Loss Accounts; and
- Balance Sheets
for the last five years.
2. Copies of personal and business income tax returns for the last five years.
3. Copies of the business’ Aged Debtors' Analysis. - Note in particular the percentage of Debtors that have been outstanding for more than 60 and 90 days.
4. Access to:
- Cash Payments Book
- Cash Receipts Book
- Tax Invoice Books
- Bank Statements
- Bank Deposit Books
- Creditors Tax Invoices
- Creditors' Aged Analysis
- Stock Records
- Work In Progress Records
- Wages Records
- Order Book
- Lease Agreements
- Business Activity Statements
5. Ascertain whether the Vendor is operating similar businesses elsewhere, however only selling one.
If this is the case:
- Check purchases, sales and wages to ensure that they relate only to the business that you are acquiring.
- Determine what Restraint of Trade the Vendor is prepared to enter into.
- Consider whether all present customers will remain with this business or follow the present owner to his/her new or continuing business .
6. Examine the stock of the business:
- Is it obviously old?
- Enquire of the stock turnover.
- How does this compare to inter-firm comparison benchmarks?
- How will the stock be valued?
7. Establish the history of the business.
8. Establish what percentage of the market the business has.
9. List the major competitors:
- What is their present position?
- What is their likely future?
- What are their reasons for success or failure?
- What are their strengths and weaknesses?
- Do you believe that you can compete with them?
- Have you developed a strategy?
10. List the major suppliers.
11. Enquire as to the suppliers' terms of trade.
- It is recommended that you contact the suppliers to ascertain their intentions.
- Will they supply you?
- On what terms?
12. Enquire as to the business’ terms of trade with its customers.
- Check whether they are enforced.
13. Ascertain whether the business promptly renders its:
- Tax Invoices
- Monthly Debtors' Statements
- Does the business follow-up payment by debtors?
14. Check the plant and equipment owned by the business.
If you don't have the necessary expertise to carry out these checks, insist on an inspection (as part of the contract) by a qualified person prior to settlement.
15. Enquire as to whether the plant is:
- on hire purchase
16. If the business is operated from leased premises - obtain a copy of the Lease Agreement.
17. Has the business owner the right to negotiate for the transfer of the lease?
- You should have discussions with the landlord and obtain the landlord's written approval for the transfer of the lease.
18. Examine the terms of the lease and particularly note the clauses discussing:
- the removal of fixtures and fittings
- plant and equipment
- rectification of the premises
- option periods
- number of days prior to the expiration of the present lease period in which you have to give notice of exercising a right of an option
- how often the leased premises have to be painted?
- who pays for repairs and maintenance and refit requirements?
19. If the building is owned by the Vendor, is the building being sold?
- If so, obtain details of the building's written down value (if it is eligible for tax deductible depreciation write-off).
- Have a qualified person inspect the building to ascertain its condition.
- You should note that repairs and maintenance carried out within 12 months of acquisition is normally not tax deductible.
20. In what name is the building registered?
21. Obtain details of the Title Deed.
22. Check with the Local Council as to the zoning for the premises.
- Are there any restrictions on the type of business activities that can be carried out in the building?
23. Ascertain the price the owner wants for the business.
- Ask what the apportionment is between land and buildings, plant, fixtures, motor vehicles, stock (if you are taking over) and goodwill.
24. If you are taking over debtors - beware!
- Obtain full details of all debtors.
- Obtain a detailed Debtors' Aged Analysis.
- Never agree to pay 100 cents in the dollar for Debtors - or if you do, delay payment until you actually receive 100 cents in the dollar.
25. Determine which employees you will be retaining.
- Ascertain their period of service.
26. Have a calculation prepared and an appropriate adjustment made for:
- Holiday Pay
- Sick Leave Entitlements
- Redundancy Entitlements
- Long Service Leave
27. If you are acquiring employees who have more than say five years service, have an adjustment made for Long Service Leave Entitlements that will accrue to them after ten years service with the business, not particularly with you.
28. Ensure that you are going to be given an accurate customer list for the business.
- Together with details of sales made on an annual basis over the last five years.
29. Enquire as to the intentions of the Vendor.
- What are they going to do after selling the business?
- Have they any family members operating similar business in close proximity to this business?
- Will the Vendor sign a Restrictive Covenant? You should determine a reasonable period for the Restrictive Covenant and the penalty if the Vendor breaks the Restrictive Covenant. You should talk to your solicitor about the wording of the Restrictive Covenant.
30. Will the Vendor stay on with you in the business for a reasonable period to introduce you to the existing customers and to assist in the business change-over?
31. Determine the method of valuing stock. If possible, insert a clause that you do not have to acquire all the stock, but only the stock that you want.
32. Politics - is legislation likely to change, which will reduce the business activities - or increase costs? (Will this increase in taxes or changed policies have an adverse affect on the business?).
33. If gazetted trading hours change - will this adversely affect the profitability of the business?
34. Are wages stable?
- Are wages likely to increase?
- Will the staff you are taking over be willing to work for you for the same rates and conditions as they did for the Vendor?
35. What is the state of the economy?
- Have the last few years been boom years?
- What are the years ahead likely to be - boom or bust?
- How will that affect this business?
- Can you maintain the profitability?
36. Obtain from the Vendor a month by month schedule of sales made in the last five years.
37. Check whether any large Credit Notes were processed in July/August. This could mean that annual sales to 30th June have been overstated.
38. Have a credit worthiness check run on the business.
- Has there been legal action started by or against the Vendor?
39. Are there changes in social behaviour which could affect the business? e.g. video affects on cinemas, weekend shopping.
40. Will changes in technology affect the business operations or the products or services being sold?
41. Are there any proposed changes in Town Planning Regulations which will affect the business?
- It is recommended that you enquire at the Local Council.
42. Who are the customers?
- Into what categories do the customers fit?
- Education levels?
- Ethnic Group?
- Family structure etc?
- Are you satisfied that you have the necessary skills, patience and temperament to service the customers of the business?
- Is there likely to be any change in the customer mix over the next four years which could affect the operations of the business?
43. Have you reviewed the operation of the business?
- Do you believe it is operating efficiently?
- If you are proposing changes, have you calculated the realistic cost of these changes?
- Have these costs been included in your list of capital requirements?
44. Do you intend to re-employ the present employees?
- You should receive a list of their individual job specifications.
- Review the work and responsibilities of each of them.
- Effective Human Resources Management is vital for he success of every business.
- Are you satisfied that you can work with this group of employees?
- Examine the employment contracts of these employees - noting any particular clauses or agreements.
- Alternatively, are you satisfied that you can hire the necessary employees required?
45. Does the business have the right product mix?
- Have you received full details of the sources of:
- formulas etc
46. Does the business operate under any:
- permission to produce under license?
- copyrights etc?
- As a condition of the contract the right to use will have to be transferred to you and the ultimate owner of the "right" will have to agree to the transfer.
47. Check the Order Book.
- Do forward orders exist?
- Check the Gross Profit Margin on the orders - is the percentage similar to that which has been obtained in the past?
- Contact some of the customers who have placed orders to ensure that they intend to proceed with the purchase.
48. If you are taking over partially completed contracts - check thoroughly that every thing is satisfactory and that you can complete the order profitably.
49. Obtain a copy of he Creditors' Aged Analysis.
- What are the ages of the outstanding balances?
- Does the Creditors' Analysis "line up" with the suppliers' terms of trade?
- If not, enquire as to why not. (A significant variation may mean that the business is not operating as well as stated).
50. Check the Bank Reconciliation Statement.
- What is the age of unpresented cheques?
- Have creditors' cheques been drawn merely to make the Creditors' Aged Analysis look satisfactory?
51. Quality Control - is there a system in place?
52. Find out what the stock buying pattern is for the business.
- When do you have to order winter stock or summer stock?
- Can you buy specific stock other than at those times?
- If so, at what cost?
53. Has the business successfully implemented suitable systems and policies for GST?
54. If you are planning to acquire:
- shares in a company
- units in a unit trust; or
- an interest in a partnership
- BEWARE! -
- Has the entity made an Interposed Entity Resolution?
- In the case of a unit trust - resolved to be a family trust?
Remember, what you are looking for are clues that the business is not what it's being built up to be by the Vendor or the Agent.
The buyer must beware - check, double check and cross check everything!
Once you sign the contract - it's very difficult to renegotiate.
Contact us if you need any assistance with Buying a Business.