After you have made the decision to purchase a business, much of your future success will depend on the actions you take before you ever complete the transaction. While purchasing an existing business has many advantages over starting a new business from the ground-up, those benefits are only advantageous when you understand how to properly evaluate a business for possible purchase.

There are a number of factors that you should take into consideration when evaluating a business for possible purchase. Just as it’s never a good idea to fall in love with a home before the inspector finishes his final report, it’s also never a good idea to imagine yourself operating a business before you have taken the time to evaluate it properly.

Begin by evaluating the location. As the old cliché in the real estate industry goes; location really is everything. Many businesses, while seemingly possessing all of the other factors for certain success, have failed simply because of location.

Consider the specific needs of that business and industry as well as zoning requirements, the overall safety of the area, the population density and customer base as well as the nature of surrounding competition. When considering location, it is also important that you analyze traffic patterns and accessibility as well as parking conditions. Finally, don’t forget to factor in the separate cost of the location.

No comprehensive evaluation would be complete without taking into consideration the physical assets of the business such as equipment, fixtures and existing inventory. Does everything appear to be in good condition or will numerous items need serious repair once the purchase is complete? What about the inventory? Is it well stocked or will you need to replenish or make changes?

Make sure you spend a good bit of time analyzing the products and services offered by the business. If you are not completely familiar with this industry, this aspect of the evaluation will prove to be even more critical.

Factor in existing relationships with suppliers and distributors while analyzing the existing customer base and loyalty level. Are the products and services already offered strong enough to withstand a change in ownership? Will the customers continue to support the business or will you need to begin building from scratch?

While your purchase of the business certainly doesn’t include the existing personnel, in most circumstances it is anticipated that you will retain the existing employees-at least for awhile.

Take the time to find out whether you can work with the personnel already on staff or if that area of the business may need overhauling as well. Ask to review management records and also be sure to take a step back and evaluate how customers respond to existing staff members. Their response can speak volumes.

How Do You Analyze the Financials of the Company you are Looking to Purchase?

The first rule of thumb that you must understand when analyzing the financials of any business that you are considering for purchase is that you must look evaluate the financial records for at least the last five years. Minimum.

Anyone can cook the books and make it appear that they are showing a profit when in fact they could be drowning in a sea of debt and looking to cast their albatross off to an unsuspecting buyer.

The critical point here is to thoroughly investigate all records to determine the bottom line-are profits increasing or decreasing and by how much? In order to do this you will need to evaluate the financial records from several different perspectives. Do not simply rely on the information provided to you by the seller. Go in armed with an arsenal of your own questions and make sure you have cleared enough time in your schedule to complete a thorough investigation.

Always make sure that you ask to see the operating expenses. This will include the amounts of money going in as well as out of the business. Now, unless you are extremely familiar with the industry and know without a doubt how much these numbers should amount to; it’s always a good idea to compare these expenses to those of similar businesses.

A thorough financial review will include scrutiny of the following documents: past income statements, cash flow statements, balance sheets, articles of incorporation, past tax returns, statements regarding projected financials and any liabilities documentation. Also ask for documentation on any past or pending litigation as well as copies for all major contracts.

You should also take the time to have a thorough credit report run on the business. This step can help you to determine exactly where the company stands and also perform a check-up on the information that has been provided to you by the seller. If everything looks good on paper, but the credit report comes back with a seriously low score; this can be a strong indication that the information you have been given has been cooked.

Finally, don’t try to go it on your own. The most experienced and successful business people in the world will tell you that they rely on the advice of experienced accountants and attorneys when considering the purchase of a business.

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