Buying a Business: Do Your Homework Because "Low-Risk" Doesn't Exist
I recently received an email from a business brokerage advertising their services. In the email the brokerage said they have "low-risk" businesses and franchises for sale. While that may make for good marketing - I must unfortunately say that "low-risk" businesses do not exist in my opinion. If our struggling economy has shown us anything, it has demonstrated that risk is inherent in business. To advise otherwise minimizes the enormity of the decision to purchase a business.
Now don't get me wrong. I am not knocking the business brokerage. It's their job to sell businesses and that's just what they are attempting to do. But the prospective buyer should be more cautious and take the time to understand the inherent risks of ownership in the business you intend to buy. It is absolutely critical to conduct due diligence. Appropriate due diligence includes examination of the following areas in the business:
- Organizational documents and good standing with state and/or federal authorities
- Financial information
- Physical assets
- Real Estate
- Intellectual property
- Employees and employee benefits
- Licenses and permits
- Environmental issues
- Taxes
- Material contracts
- Product and service lines
- Customer information
- Litigation
- Insurance Coverage
- Professionals
- Articles and publicity
See this due diligence checklist for more details. It is a very comprehensive checklist. The level of due diligence will likely vary with the size of the business transaction but this list should give you a good outline of the issues to consider.
