Buyer Must Prepare Document Request List
Every buyer of a business should strive to uncover a sufficient amount of information about a business that justifies the buyer’s decision to purchase the business. This information gathering process typically takes place in stages, with the most thorough and confidential company information disclosed during the formal due diligence process (after a preliminary offer and acceptance). Prior to the due diligence process taking place, a business buyer must prepare a document request list that encompasses the financials of the business, any liabilities of the business, all assets owned by the business, and the risks associated with the business.
Request Financials of the Business
- A business buyer should request the last three years of the company’s profit and loss reports and tax returns.
- This will detail the history of the company’s sales, expenses, and owner benefit for each year.
- The owner benefit of the business includes unrecorded sales, personal expenses that the owner runs through the business, non-cash expenses (such as depreciation), or any company expenses that will not be incurred by the buyer.
- The financials must be adjusted (typically by the business broker) to reflect the actual owner benefit for each year.
- A business buyer should closely examine the financials to determine how sustainable the owner benefit has been over time, and whether it is growing or decreasing over time.
- If there are any unusual factors affecting the financials (such as the gain or loss of a major customer), then the business buyer should discuss these issues with the seller.
- In rare instances such as an asset sale (when a business has no profits), no company financials will be available.
Request Asset List of the Business
Every business buyer should request an asset list from the seller. An asset list will describe all of the physical assets owned by the business which are included in the sale. Every major item of physical equipment should be itemized and described by its year purchased, approximate current value, and brand name or serial number. Smaller items of physical equipment should still be described (such as ‘assorted tools’) with an approximate value. Additionally, for retail-related businesses, an inventory list should also be requested. An inventory list should describe the age and cost of each item.
Request Copy of Lease
If the business has a commercial lease, then the leasehold interests are a part of its asset value. A leasehold right is the right of a commercial tenant to temporarily occupy and use leased property (creating leasehold interests). This leasehold right is memorialized in writing via the commercial lease, and should always be requested by a business buyer. The leasehold interests includes any improvements to the interior or exterior of the commercial property (made by the landlord or tenant), and typically conveys with the lease. The actual premises should be inspected by the business buyer, and the lease conveying the premises should be examined by the business buyer or their attorney.
Request List of Liabilities of the Business
Liabilities of a business are legal debts owed to third party creditors. This frequently includes accounts payable (money owed to vendors or employees), bank debt, or equipment debt. Every buyer should request a list of a company’s liabilities with accompanying documentation that itemizes each item of legal debt. In most cases, the company’s liabilities are not conveyed to the business buyer. The seller simply pays off the debt at closing or does not convey the debt after the sale. In particular, bank debt (such as a company’s line of credit) is almost never conveyed to a small business buyer. Of course, the disclosure and status of a company’s liabilities must be addressed in the purchase agreement between the buyer and seller.
Request Documents Disclosing Risks of Business
- Every business buyer should analyze the major risks associated with the business model or previous activities of the business being purchased.
- In order to best determine the documents sufficient to disclose the risks of a business, a buyer should formulate a list of questions and concerns about the business.
- Issues to address include how reliant the business is on its suppliers, how legally compliant the company is with respect to its staff and working environment, the degree of customer concentration, and the payment terms the company receives from its customers.
- Every business is different, so the business buyer must create their own list of concerns that fits the unique needs and challenges of the business.
- Documents that may address the risks of a business include copies of invoices from suppliers, copies of invoices or receipts from customers, W2 and payroll tax records, monthly bank statements, an accounts receivable report, and a detailed list of sales by customer.
Other Means to Obtain Information About A Business
- Some business owners may simply not have most of a buyer’s requested documents because of poor record keeping.
- Other business owners may have a great deal of unrecorded sales or expenses, and hence do not wish to disclose any financials or related documents.
- Under such circumstances, a business buyer should not give up on the potential purchase.
- The business itself may still be quite valuable and worthy of the purchase price.
- The business buyer may seek to personally investigate the business by physically ‘observing’ the business operations (with the seller’s consent) for a set period of time.
- This information gathering process may be time consuming, but it is often the only way to uncover the true worth of a business when the financials and other requested documents are largely unavailable.
It is the right of every business buyer to request whatever documents that enables them to make an informed decision as to whether the value of the business justifies the purchase price. A professional business broker should always assist and guide a buyer through this process.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.