Buying a Business in St. Louis: A Due Diligence Checklist
Have you ever dreamt of running your own business? St. Louis is the perfect starting point, with over half a million small businesses in Missouri.
But perhaps the intricacies and risks of building a business from scratch are too risky for you. There is another option, though, and that’s to buy an existing company.
When you do that, you’ll need to carry out due diligence. Here’s a due diligence checklist to help ensure you cover every check you need.
Business Fundamentals
You’ll want to check a few basics at the start of any due diligence process. The first is the business model.
The business model will tell you whether you are buying a business that can make money. Business models vary. Still, they all need to show you an operation that can solve specific market needs, making a profit along the way.
Ask questions about how the company adds value to a customer. Plus, it should outline how that business creates and delivers its products and services.
The next basic information you’ll want is the business’s profit and loss accounts. That will provide evidence about whether the business model is workable or not.
Finally, you’ll want to see a list of assets and liabilities. That will tell you how much value the business currently holds.
Legalities
It’s essential to grasp the legal framework surrounding a business acquisition. Otherwise, you could run into problems with the law or unnecessary costs.
First, check the company has the correct licenses and permits to operate in their industry. Second, ensure the company owns the intellectual rights to vital assets. That includes patents, trademarks, and copyrights.
Finally, check whether the company has any existing legal disputes, such as a dispute with a customer. It could leave you with potential costs or reputational damage. It’s essential to know about this upfront before making an offer.
Review the Management Team and Other Employees
Staff are the biggest asset of any company. Their talent and creativity is what can make a business grow. So check the teams as part of your due diligence.
Look at management roles and the background and experience of those individuals. Identify talent gaps in the group.
Examine employee morale. Check salaries, benefits, and retention rates. Look at what training the company offers to staff.
All this will show whether you’re buying a highly productive and motivated team when you invest in the business or whether there is work to do.
Review the Market
You want to know that you are entering a market that has promise. You’ll need a picture of the market profile and competitors. First, check the company’s share in the industry.
For a local business, examine by geography when you do this. Second, identify competitors and run a SWOT analysis.
Next, look at current trends. You want an industry that’s on the up, not in decline. Look at how demand has changed and any market innovations that could threaten the status quo.
Ask yourself whether there is room for expansion for the business, either into new markets or by launching other products or services.
Check Relationships With Suppliers and Customers
Good relationships are the glue that holds a business together. Any growing enterprise must have nurtured solid relationships with its suppliers and customers.
You can check this as part of your due diligence.
Start by reviewing customer relationships. Examine what customer service process is in place and statistics on customer complaints, issues, and public reviews.
Review supplier relationships to spot glaring problems like outstanding payments or late deliveries.
By reviewing both relationships, you can help prioritize any issues if you do take over the business.
Check the Company’s Online Presence
Most modern businesses have an online presence. For some, it’s central to their business model. For others, it’s mere marketing. However, reviewing all digital assets when buying a business is essential for all companies.
Check for a website and social media profiles. You should also examine the company’s branding.
Other information to review includes website traffic, social media numbers, and online reviews. You should check engagement statistics and conversion rates if it’s an eCommerce business.
Spot Red Flags
Potential red flags could show that a promising business could become a costly investment. Here are the red flags you need to monitor:
- Unpaid tax
- Pending lawsuits
- Potential lawsuits
- Repeated patterns in customer complaints
- Financial discrepancies
- High staff turnover
- Overdependence on one customer
- Overdependency on one supplier
- A recent change to the leadership team
In addition to this list, be mindful of anything else that looks out of place or gives you cause for concern. At the very least, do some further research to alleviate any worries.
Final Checks Before Signing
If you’re happy with all your investigations, you will want to progress to the signature process. However, this is also when you must run some final checks.
First, review the terms of the contract. If your due diligence found any concerns, now is the time to review those terms and ensure you are happy with them.
If not, you might consider renegotiating the price to reflect those issues you found. It will help protect your interests.
Take the time to review any last-minute disclosures from the seller. That can happen, and you shouldn’t shortcut the review process as those may be important issues.
Next, consider your transition plan and speak to the seller about how it will work. A smooth transition is essential because problems could damage your revenue, or you could lose customers or employees.
Finally, plan the communications for when you sign. Letting everyone know what’s happening as soon as possible is crucial.
Use This Due Diligence Checklist to Make the Right Investment
We hope you find this due diligence checklist helpful. Use it to ensure you make a sound investment and don’t regret your decision. Taking the time to check a company now will save you from problems later.
Are you ready to make the plunge and buy a business? If so, our business brokerage at Fusion is the perfect place to start. Browse our vast database of businesses for sale to find the perfect one for you.
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The Main Reasons Why the Sale of Your Business Can Fall Through
Selling any business can be complicated. Finding the right buyer is one hurdle that must be overcome. However, even once the right buyer has been found, there are still many reasons why a deal can collapse.
Unpredicted Events
It is important to realize that you can do everything perfectly and “acts of fate” can still intervene and impede the success of your deal. For example, one issue is that you might not be able to satisfy the buyer in regards to demonstrating the earnings of the business.
A second issue is that during the sales process problems may arise with federal, state and/or local government bodies and agencies. Many of these problems may be quite difficult to predict in advance. A third issue is that the buyer’s investigation ultimately reveals some problem regarding the business that was previously unknown.
Simply stated, a seller cannot guard against every single possible unforeseen act of fate. The best any seller can do is look for potential problems and try to remedy them in advance. Working with a business broker or M&A advisor can be an excellent way to identify all types of business problems and adjust accordingly.
Buyer Issues
Another major reason that deals can fall through are issues with the buyer. Many sellers are just “testing the waters” or lack the commitment and resolve to see the sales process through, which is often much more complicated than many sellers realize. This issue marks the importance of working with an experienced business broker or M&A advisor who hopefully can weed out these uncommitted buyers in the beginning.
Often buyers will fail to be honest about their situation or how capable they are of buying the business. Business brokers are experts at assessing the potential of interested buyers, and that means they can typically save sellers a great deal of time and aggravation. But even with the best brokerage professionals on your side, it’s important to realize that buyers can still be unpredictable.
Third-Party Interference
A particular source of deal killing frustration can be that buyers are influenced by third-parties who are opposed to the purchasing of the business, for a variety of reasons, and will work to kill the deal regardless of its merits. Everyone from landlords who may not want to transfer a lease or grant a new one to outside business consultants, such as attorneys, may all intentionally or unintentionally create a range of problems that interfere with the success of the sale.
There are many pitfalls that can derail the successful sale of a business. Identifying those kinds of issues far in advance is one way to dramatically boost your chances of a successful sale. Working with an experienced business broker or M&A advisor can help to dramatically increase the odds of finding the right buyer for your business.
Copyright: Business Brokerage Press, Inc.
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Help Buyers to Understand How You Excel
No business is perfect, but when you are preparing your business to be sold, it is imperative that you lead with your strengths. That’s why it is important to work with a business broker or M&A advisor to identify, catalog and work to remedy any weaknesses. When presenting your business to prospective buyers, focus on your key selling points first and what makes you really stand out from the crowd. You want to sell a prospective buyer on the value of your business and its long-term potential before addressing any shortcomings or areas that need to be improved.
Most business owners who are selling a business are doing so for the first time. If you’ve never sold a business before then there are many mistakes and traps that can befall you. Selling a business is typically not a fast and easy process, but can instead take many months or even years.
Working with a business broker is one way to ensure that the process goes smoothly, but there are other steps that you can take to help ensure that your business sells. At the top of the list of steps business owners can take to help their business sell is to maintain normal operations. Again, it is very unlikely that your business will sell as soon as it hits the market. To protect the value of your business and to avoid financial trouble, you have to maintain normal business operations throughout the sales process.
The next key step to take is to get your business ready. It likely took years, or even decades, to get your business to where it is today. You shouldn’t expect that preparing your business to be placed on the market should be an overnight process. One of the best ways to properly present your business is to inspect every aspect of your business and its operations. In this way, you’ll discover what areas need work and what strengths are best to promote.
Brokerage professionals know where the competitive advantages of businesses reside and have an understanding of what buyers really want. An incorrectly priced business can scare away otherwise excellent potential buyers. The same holds true for poorly organized paperwork and financial records. In short, the preparation you make now to sell your business later can be invaluable for achieving the results you seek.
At the end of the day, you must remember that selling your business is a financial transaction. Like all kinds of sales, you must understand not only what the buyer needs but what they want as well. Not every business is right for every buyer.
Copyright: Business Brokerage Press, Inc.
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How to Transfer Business Ownership
There are over 32 million small businesses in the United States. Many businesses enter and leave their respective industries each year, but there are also times when people transfer ownership to another party. Closing a business doesn’t have to be a negative experience – it can allow you to cash out and enjoy your years of hard work.
We’ve put together a brief guide on how to sell a business the right way. Let’s explore how to transfer business ownership.
Determine Your Needs
Before you transfer ownership, it’s essential to understand your needs. You should properly appraise your company before moving forward.
You can then figure out an asking price when you sell. It’s worth being open-minded when it comes to negotiation.
Consider more than the dollar amount the other party offers. For instance, someone who purchases your business may want you to work part-time at the company for two years to help get everyone else up to speed. If this isn’t something you’re comfortable with, it’s best to negotiate with them or find other buyers.
Consider Your Business Structure
Your business structure will affect your transaction. It does so in operational, financial, and legal ways. Let’s explore some of the most common business structures.
Sole Proprietorships
Many people run a business as a sole proprietorship. This is a company that has a single owner, but it operates differently from other business entities.
You can’t directly sell a sole proprietorship, but you can sell the assets you own. You can also sell rights to your liabilities. An example could be someone who owns a successful clothing brand as a sole proprietorship.
He’s ready to sell his assets and move on to other projects. In this case, he would appraise his business assets before looking for a buyer.
LLCs
An LLC is a limited liability company that is meant to protect the business owner’s assets during a lawsuit. Limited liability companies are a bit more complicated than sole proprietorships.
Using the above example, let’s assume that three people own the same clothing brand. Instead of selling the business outright, an owner who wishes to leave the brand could sell their stake to the remaining owners. The LLC would then draw up a new operating agreement that excludes the former owner.
Partnerships
Business partnerships are subject to state regulations, so you’ll have different requirements depending on where you’re located. In a partnership, someone who wants to transfer ownership would allocate their ownership stake to the remaining owners.
If an owner of the aforementioned clothing brand wants to transfer ownership, they may be entitled to business capital and income per the operating agreement.
So, even though they’re leaving the company, they can still benefit from receiving income and capital shares for a predetermined time. After the owner departs, the operating agreement will be updated to reflect ownership by the remaining individuals.
Incorporations
Companies can be either a C corporation or an S corporation. In both entities, ownership is determined by the number of shares owned. This is measured as a percentage.
To transfer ownership, you will need to transfer shares to another party. These can be gifted, bequeathed, or sold. Legally, an S corporation cannot have more than 100 shareholders.
If the transfer of shares would create more than 100 shareholders, the transfer of ownership would be prohibited in this scenario. In some cases, owners may need to seek approval from other shareholders or a board of directors if they want to transfer ownership of their shares.
It’s best to work with an attorney in situations like these so you can maximize your gains and minimize your tax liabilities.
Let’s assume there’s a business with three owners who equally split 900 private shares. One owner could sell their 300 shares to the remaining members before leaving the company.
Choose the Best Transfer Method
The best method will depend on the above factors. For instance, you can’t outright sell a business if you’re only a part owner.
Similarly, you might not be able to sell your company shares if the board of directors doesn’t approve. In most scenarios, though, the transfer of ownership doesn’t have many obstacles.
Getting Started
To get started transferring ownership of your business, it’s best to work with a professional. They have the experience necessary to get you the best results.
When searching for someone to hire, keep an eye out for what other clients have had to say about their experiences. Look for mentions of the professional’s timeliness and the results they got.
Consider how communicative they are, as well. It should be easy to get in touch with them, and they should be willing to help you reach your goals.
Ask about their pricing structure so you can understand what you’ll need to budget for. You can think of this as an investment into your future, as they can help you get the most money out of your business transfer.
You should also get in touch with an attorney. This will help ensure you don’t make mistakes that can lead to legal issues.
Understand How to Transfer Business Ownership
Finding the appropriate party to sell your business can determine whether you get the outcome you desire. As long as you understand how to transfer business ownership the right way, you’ll avoid many issues you may have otherwise encountered.
From here, you can get started toward your next venture or enjoy your retirement from business ownership. Book a consultation today with our professional team at Fusion. We have the tools and resources to guide you through the process.
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Four Questions to Ask Yourself Before Purchasing a Business
Truly understanding a business is much like understanding the condition of a car. It is necessary for a skilled mechanic to “pop the hood” to access the true condition of a car. In much the same way, you and your team of experts need to “pop the hood” of the business in order to understand the business’s long-term health and viability. Here are four things to consider before signing on the dotted line.
Will You Enjoy the Work?
Owning a business, especially if you are planning on being an owner-operator, can be a demanding path. You will likely have to log many hours, especially in the beginning. For this reason, you’ll want to select a business that you will enjoy owning.
Life is too short to own a business that you would not want to be involved in. Importantly, if you do not like the business you own, the odds of facing burnout and losing interest are higher. It goes without saying that these kinds of obstacles can dramatically harm your business. Think long and hard before selecting a business to buy, as it is a decision that you will have to live with for years to come.
Did You Examine the Business Plan?
A second factor to consider is that there is no replacement for a good business plan. When you are considering buying a business, you’ll want to dive in and understand every aspect of the current owner’s business plan. If the business plan has major holes or just doesn’t seem to be adding up, you should move on.
Do You Understand the Financials?
Similar to understanding the particulars of a business’s business plan, it is also critical that you have a very precise and clear view of a business’s financials. You should look over everything from profit and loss statements to tax returns and more. It is a smart idea to consult your accountant and a brokerage professional regarding what financial documents you should review. Before you buy a business is the time to understand every small detail of a business’s financial health, not after.
How is the Business Performing?
A fourth factor to consider when evaluating a business is the business’s overall performance. It is possible for a business to have a good business plan (at least on paper) and strong financials and yet it could still have a less than stellar future. Oftentimes, the true health of a business lies beyond the business plan and the current financials.
You’ll need to know about a wide variety of factors including how vulnerable the business is to competition, changes in market forces, the status of key management and employees, the relationship with key suppliers and customers, and any pending litigation. When buying a business, you simply can’t afford to overlook any area.
If you keep an eye on these four key areas, and work closely with experienced professionals like business brokers or M&A advisors, your odds of finding the right business for you will skyrocket. Owning a business that you love will greatly increase your chances of success, so don’t underestimate the emotional factor in the equation.
Copyright: Business Brokerage Press, Inc.
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