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Someone might also be selling because of a partnership disagreement or the fact that the business is not making any money. This last reason may not be as detrimental as it may seem. Often a new, vigorous management will make an enterprise bloom.
Many people who are in the market to buy an existing business are not entrepreneurial. Downsizing has let loose a great number of men and women with severance dough burning holes in their stone washed jeans. Immigrants, or would be immigrants, whose goal is to buy a job at all costs, add to the pressure.
The business that you are seriously considering putting an offer on is likely in the same field as your present work, in which case your expertise is as good as, if not better than, anyone else’s. However, if this isn't the case, it would be wise to obtain the services of one or two people with experience in the same field. They need not necessarily be consultants—an informal “look see” by a trusted friend will do for openers.
If you don't know anyone (or do not wish to show the potential deal for fear that the person may snatch it away from under your nose), ask your accountant or lawyer to recommend someone. Under no circumstances incur expense unless you are sure that a deal is possible. But do talk to owners of neighboring shops, the vendor's bank, a few of the suppliers, etc. These conversations should be of an informal nature; if you appear to be snooping around, it will make the vendor sore. Also keep in mind the fact that vendors do not want their staff, customers, or neighbors to know that they are selling out.
As a potential purchaser, you will obtain access to the vendor's confidential records. You will then attend to verifying this information. This process is called “due diligence.” It is an investigation into the data provided by the vendors regarding volume, overhead, profit, lease, etc. Due diligence is performed at the purchaser's expense by an accountant or other experienced person—often by the purchaser with some outside help.
Among the things to investigate are the following: Are there any barriers to growth? (An example would be a luncheonette seating 22 which is obviously limited to serving a maximum of 45 dishes over a busy lunch period. But check their take-out business.) What are your obligations regarding existing staff? Are you by buying the company taking on the previous owner’s debts and obligations? Also, are there any unresolved lawsuits, product warranties, or other liabilities?
The existing lease should be gone over with a fine-tooth comb. It may state that the lease is renewable for a specified period at a stipulated rent, but may be conditional on the original tenants having lived up to their part of the bargain such as paying rent on time, promptly settling bills for maintenance, etc. If the lease is transferable, does it restrict the tenant to the same business? Can you sublet, in which case must the lease be re-negotiated? It is advisable to independently contact the landlord, thus making sure there are no problems later on, especially if you are purchasing the assets rather than the company per se.
You will also need to calculate the cost of upgrading the facilities and equipment, add the annual depreciation back into the cost of operating the business, and find out if there are any tax ramifications. It is also a good idea to look into the company's history, such as its customer and client list, marketing program, status and/or supply of brochures, catalogues, and replacement parts for products (if any).
All of the above should be included in the due diligence process. Normally, the vendor reveals such confidential information only when there is a non-binding letter of intent or conditional offer on the table. The vendor then considers you a serious buyer and will provide the information required. You will also agree to a specified number of days for verification of the data and must come to a decision within the time; this is fair to both parties.
Manny Drukier has been in business, from manufacturing to publishing, retail to real estate, stocks to stockpots for the past 60 years. He is the author of two books and resides in Toronto, Canada.
