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What Documents to Ask for When Buying a Business

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When buying a business, one of the most critical steps in ensuring a successful acquisition is conducting thorough due diligence. This process involves reviewing a wide range of documents that provide insight into the financial health, legal standing, and operations of the business you’re considering. By asking for the right documents, you can uncover potential risks and opportunities, and make an informed decision about whether to proceed with the purchase.

In this article, we’ll break down the key documents you should ask for when buying a business. These documents will help you assess everything from the financial health of the business to its legal compliance and potential liabilities.

1. Financial Statements and Tax Returns

Financial statements are crucial in evaluating the financial health of the business you’re buying. The most important financial documents to ask for include:

a. Profit and Loss (P&L) Statements

The P&L statement, also known as the income statement, shows the business’s revenue, expenses, and profits over a specified period (usually monthly, quarterly, or annually). This will give you a clear picture of the business’s profitability and help you identify trends in revenue and expenses.

b. Balance Sheets

The balance sheet provides a snapshot of the business’s assets, liabilities, and shareholders’ equity at a specific point in time. It is essential for assessing the business’s financial stability and liquidity.

c. Tax Returns

Request the last 3-5 years of tax returns. Tax returns will give you an insight into how the business reports its income and expenses to tax authorities and help identify any discrepancies with the financial statements.

Internal Linking Opportunity: If you’re looking for advice on evaluating businesses, check out our due diligence checklist.

2. Business Contracts and Agreements

The interest on a loan used to buy a business will generally be deductible if the loan is used to finance the purchase of a business that generates income. However, the tax deductibility of the loan interest will depend on the structure of the business purchase. There are different ways businesses are bought: asset purchases and share purchases, each of which may affect the deductibility of interest.

a. Customer and Supplier Contracts

These contracts will show you the terms of the business’s relationships with customers and suppliers. Look for long-term agreements or commitments that could affect future revenue streams.

b. Lease Agreements

If the business operates from a leased location, you’ll need to review the lease agreement to understand the terms, including the duration, rent, and renewal options.

c. Employment Contracts

Employment contracts outline the terms of employment for current employees. Review these to understand the salaries, benefits, and any non-compete or confidentiality clauses that could affect future operations.

d. Franchise Agreements (If Applicable)

If the business is a franchise, you’ll need to review the franchise agreement to understand the franchisor’s terms, fees, and obligations. Franchises can be a great investment, but it’s crucial to know what’s required before making a purchase.

Internal Linking Opportunity: Explore our franchise business listings to discover franchise opportunities.

3. Legal Documents

Legal documentation is essential to ensure the business operates within the law and that the ownership transfer will be smooth. The key legal documents you should request include:

a. Incorporation Documents

Legal documentation is essential to ensure the business operates within the law and that the ownership transfer will be smooth. The key legal documents you should request include:

b. Intellectual Property Documentation

If the business owns trademarks, patents, or copyrights, you need to verify ownership and the validity of these intellectual property rights. Intellectual property can be a valuable asset, so it’s important to ensure that everything is properly registered.

c. Litigation History

Ask for details of any ongoing or past lawsuits involving the business. This could reveal potential legal risks that may affect the value of the business or your ability to operate it in the future.

Internal Linking Opportunity: To learn more about protecting your investment, check out our business legal guide.

4. Employee and Payroll Information

a. Payroll Records

Review payroll records for the past year to assess the business’s salary structure and ensure employees are being paid correctly.

b. Employee Benefit Plans

If the business offers benefits like pensions, health insurance, or bonuses, you’ll need to review the plans to determine the cost and obligations you would inherit as the new owner.

c. Employee Handbook

An employee handbook outlines company policies on workplace behavior, benefits, and disciplinary procedures. It’s essential to understand the company culture and any HR issues you may face post-acquisition.

5. Inventory and Asset Lists

You need to understand what assets are included in the purchase, as this will affect the value of the business and your investment. Request the following:

a. Inventory Lists

Get a detailed list of inventory, including current stock and any aged inventory that might not be saleable. This will give you an idea of the value of the business’s goods and whether there are any excess or obsolete products.

b. Seller Financing

Request reports that value physical assets like equipment, machinery, vehicles, and real estate. These reports will help you determine the fair value of the assets you’re acquiring.

6. Business Plan and Strategic Documents

If available, request a business plan and any strategic documents that outline the company’s goals and future direction. This will help you understand the business’s growth potential and whether the current owner’s vision aligns with your goals as the new owner.

7. Bank Statements and Credit Reports

Request at least the last 12 months of bank statements to get an overview of the business’s cash flow. You should also ask for credit reports to assess the business’s existing debts and liabilities.

Conclusion

When buying a business, asking for and reviewing the right documents is essential to protect your investment and ensure that the business is financially viable. Financial statements, legal documents, contracts, and employee records are just the beginning. By conducting thorough due diligence, you can make a well-informed decision and reduce the risk of unforeseen problems down the road.

For more information on how to evaluate a business before purchasing, browse our Business Listings or check out our Business Buying Resources.

The post What Documents to Ask for When Buying a Business appeared first on Businesseek.


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