What to Look For When Buying a Business

Running your own business is something that appeals to many individuals. While it might be tempting to jump into the first opportunity that presents itself, taking the time to thoroughly evaluate the situation will go a long way toward eventual success. Knowing what to look for when buying a business will make the evaluation process less stressful. Let's take a look.

Table of Contents

1. Do a financial analysis
2. Evaluate the tax implications
3. Hire an independent accountant
4. Confirm business culture
5. Perform market analysis
6. Review legal compliance
7. Audit brand reputation

Do A Financial Analysis

Is the business you are looking at in a sound financial position now? Taking on a failing business may bring you more headaches. Take a close look at their books and financial records to see where they stand. If possible, check out the past few years to see if there is an upward or downward trend. Does the business appear to at least hold steady regarding success?

Evaluate the Tax Implications

You should take into account the business. Depending on what business structure is in place, the way taxes, debts, and profits will all be handled. There are four types of business structures you will encounter. They are sole proprietorship, partnership, limited liability company, and corporation. 

A corporation is considered a separate entity from those who own it, which is often several people. While there is no personal risk, a corporation can be sued as though it were a person. The LLC is a mix between the sole proprietorship or partnership and a corporation. This business structure offers versatility, but they are governed by individual states, so the rules change depending on where the company is located. 

A partnership splits the ownership between two or more people. There are three types of partnership and the tax laws are similar to those of sole ownership. Sole ownership means you are wholly responsible. With this structure, there is no differentiation made between you and the business.

Hire an Independent Accountant

When buying a business, hiring an independent accountant is a smart step to ensure you’re getting a clear picture of its financial health. While sellers may present financial records in good faith, there’s always the possibility of errors, oversights, or even hidden liabilities. An independent accountant provides an unbiased perspective, helping you make an informed decision.

Here’s what an accountant can help you evaluate:

• Financial Statements: Ensure income statements, balance sheets, and cash flow reports are accurate and align with the business's claims.
• Liabilities: Identify any outstanding debts, tax issues, or financial risks that could impact your investment.
• Tax Compliance: Confirm that all taxes have been filed and paid to avoid inheriting penalties or audits.

An independent accountant can also help you interpret these findings and assess whether the business is worth pursuing. Be prepared to hear honest feedback, even if it conflicts with your hopes for the purchase. The insights they provide could save you from unforeseen financial pitfalls.

Confirm Business Culture

Evaluating its culture is just as important as assessing its financial health when buying a business. Business culture encompasses the values, practices, and environment that define how the company operates. A mismatch between your personality or management style and the existing culture could lead to dissatisfaction or challenges in running the business effectively.

Start by considering whether the business aligns with your working style and long-term goals. Does its mission or the type of service it offers fit with your beliefs and lifestyle? Managing a business like a boutique retail store requires a very different approach than running a manufacturing operation.

Take time to observe the business in action. Do employees seem engaged and motivated? Does the customer base reflect a demographic you’re comfortable serving? It’s also important to assess whether the values of the business resonate with you—if you don’t believe in its mission, it will be hard to lead effectively.

Cultural Fit at a Glance

When buying a business, its culture should feel like a natural fit. If you can see yourself managing the team, serving its customers, and promoting the brand with genuine enthusiasm, the business is more likely to thrive under your leadership.

Perform Market Analysis

Understanding the market is a critical step in evaluating any business acquisition. The location, local economy, and competitive landscape can make or break a business’s success. Start by considering whether the area’s economy is strong enough to sustain the business’s operations. For instance, opening a luxury boutique in a struggling small town may present challenges that wouldn’t exist in a thriving metropolitan area. Similarly, a BBQ restaurant might struggle in a neighborhood known for vegan lifestyles and animal rights activism.

The next step is to assess the competition. In small towns, how many other businesses offer similar products or services? In larger cities, the focus shifts to specific neighborhoods or districts. A competitive market isn’t necessarily a bad thing—it can indicate strong demand—but you’ll need to determine if the business has a unique angle or advantage.

Factors to Evaluate During Market Analysis

Performing this analysis ensures that the market is suitable for the business. If it reveals strong demand and manageable competition, the business may be well-positioned for success. However, if the market is oversaturated or poorly aligned with the business’s services, it could be worth reconsidering. A careful analysis provides the clarity needed to make the right decision about buying a business in that area.

Review Legal Compliance

Legal compliance is a critical aspect to investigate before finalizing any business acquisition. Ensuring the business operates within the boundaries of all applicable laws and regulations helps you avoid potential legal and financial pitfalls. From licenses and permits to tax obligations and contracts, a comprehensive review safeguards your investment and provides peace of mind during the buying process.

Key Areas to Review

1. Licenses and Permits
   Confirm that the business has all the necessary licenses and permits to operate legally. Ensure these are:
   
   
   • Valid: Are they up to date?
   • Comprehensive: Do they cover all aspects of the business's operations?
   • Transferable: Can they be seamlessly reassigned to you as the new owner?
     
     
2. Contracts and Agreements
   Evaluate contracts with suppliers, clients, and employees. Look for clauses that could pose challenges, such as:
   • Non-compete or exclusivity clauses that limit flexibility.
   • Long-term commitments with unfavorable terms.
   • Termination fees or conditions that could impact your future plans for the business.
     
     
3. Employment Compliance
   Assess whether the business adheres to labor laws, including wage standards, workplace safety regulations, and employee benefits. Verify employee classifications to ensure there are no violations regarding full-time, part-time, or independent contractor statuses.
   
   
4. Tax Compliance
   Request documentation to confirm the business has:
   • Filed all required taxes.
   • Paid any outstanding tax obligations.
   • No pending audits or disputes with tax authorities.
     
     
5. Legal Disputes and Liabilities
   Investigate any past, current, or potential legal disputes involving the business. These might include lawsuits, compliance violations, or unresolved complaints. Understanding these risks upfront prevents surprises after buying a business.

Steps to Ensure Compliance

A strong focus on legal compliance can save you from costly surprises after buying a business. With proper due diligence, you can approach the purchase with confidence, knowing the business is on solid legal footing. If you have concerns or encounter complexities, enlisting the help of a business attorney can provide valuable guidance and ensure a smooth acquisition process.

Audit Brand Reputation

A business’s reputation is a critical factor in its market position and potential for growth. While financials are essential, a strong or weak brand image can reveal underlying opportunities or risks. Evaluating the brand’s standing among customers, suppliers, and partners helps you understand its true value and identify areas for improvement after the acquisition.

How to Assess Brand Reputation

1. Customer Reviews
   • Search platforms like Google My Business or Yelp for feedback and ratings.
   • Look for patterns in both praise and complaints to spot consistent issues.
     
     
2. Social Media Presence
   • Analyze customer interactions on social media to gauge sentiment and engagement.
   • Check for unresolved complaints or lack of activity.
     
     
3. Supplier and Partner Perception
   • Speak with suppliers and partners to assess reliability and ethical practices.
     
     
4. Professional Analysis
   • Hire a market research firm to conduct in-depth evaluations of customer perception and brand positioning.

Final Thoughts

Now that you know what to look for when buying a business, do your homework thoroughly. If all the above check out favorably and you still want to take the leap, go for it. If there is any doubt, hold off for now and look into other opportunities. In the end, the extra initial investigation will pay off. If you have any further questions, do not hesitate to contact the MB Group team.