April 11, 2013 by stirling

Aside from purchasing your home, buying a business is one of the biggest financial investments you can make. This section closely examines just some of the tax and other issues that should be considered.

Documentation

Significant part of the due diligence process in deciding whether to buy an existing business is obtaining the necessary documentation from the seller. This should at a minimum include:

Up to date Financial Statements

  • The profit and loss statement (this shows all the vital information about the business’s operation including revenues, expenses, net profit)

 

  • The balance sheet (this provides a snapshot of the financial status of the business at a particular time including its assets such as stock, inventory, equipment and cash, liabilities and equity (i.e. the total value of the business)).

 

  • Cashflow statements is vital as it summaries and specifies the inflows and outflows of the business.

Tips:

Regardless of how up to date or easy to read these documents may appear, it is important that you review these with your accounting advisor as there can be “hidden nasties” that an untrained eye may overlook or not understand.

Customer Lists

  •  You should always request a customer list, and ensure that it details how much business is received from each customer. Preferably there will be an even spread, with the business not being overly reliant on a few key customers. Where a business is dependent on just a few loyal customers, you should consider to what extent is their loyalty to the previous owner, and will they withdraw their custom once that owner has relinquished the business?

Do your homework

  • You should also request a copy of any contracts that the business is tried to, a debtors and creditors analysis, a completed listing of any stock you are taking over, a detailed reports on any plants and equipment you are acquiring, a copy of the business name registration, a copy of any consultant reports or feasibility studies, and manuals coving office and technical procedures.