Purchasing A Business Checklist

 

It is recommended that when purchasing a business, you request the following information from the vendor:Road Sign New Life Next Exit

 

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.1Copies of the business’ financial accounts i.e.
Trading and Profit & Loss Accounts; and
Balance Sheets
for the last five years.
.2Copies of personal and business income tax returns for the last five years.
.3Copies of the business’s Aged Debtors’ Analysis.
Note in particular the percentage of Debtors that have been outstanding for more than 60 and 90 days.
.4Access to:
Cash Payments Book
Cash Receipts Book
Tax Invoice Books
Journals
Bank Statements
Bank Deposit Books
Ledgers
Creditors Tax Invoices
Creditors’ Aged Analysis
Stock Records
Work In Progress Records
Wages Records
Order Book
Lease Agreements
Business Activity Statements
.5Ascertain whether the Vendor is operating similar businesses elsewhere, however only selling one.
If this is the case:
Check purchases, sales and wages to ensure that they relate only to the business that you are acquiring.
Determine what Restraint of Trade the Vendor is prepared to enter into.
Consider whether all present customers will remain with this business or follow the present owner to his/her new or continuing business
.6Examine the stock of the business:
Is it obviously old?
Enquire of the stock turnover.
How does this compare to inter-firm comparison benchmarks?
How will the stock be valued?
.7Establish the history of the business.
.8Establish what percentage of the market the business has.
.9List the major competitors:
What is their present position?
What is their likely future?
What are their reasons for success or failure?
What are their strengths and weaknesses?
Do you believe that you can compete with them?
Have you developed a strategy?
.10List the major suppliers.
.11Enquire as to the suppliers’ terms of trade.
It is recommended that you contact the suppliers to ascertain their intentions.
Will they supply you?
On what terms?
.12Enquire as to the business’s terms of trade with its customers.
Check whether they are enforced.
.13Ascertain whether the business promptly renders its:
Tax Invoices
Monthly Debtors’ Statements
Does the business follow-up payment by debtors?
.14Check the plant and equipment owned by the business.
Is it modern?
Does it meet Government requirements?
Are there any requisitions?  (Orders from a Government Department for repairs/modifications to be undertaken).
If you don’t have the necessary expertise to carry out these checks, insist on an inspection (as part of the contract) by a qualified person prior to settlement.
.15Enquire as to whether the plant is:
owned
on hire purchase
leased
 outdated
.16If the business is operated from leased premises – obtain a copy of the Lease Agreement.
.17Has the business owner the right to negotiate for the transfer of the lease?
You should have discussions with the landlord and obtain the landlord’s written approval for the transfer of the lease.
.18Examine the terms of the lease and particularly note the clauses discussing:
the removal of fixtures and fittings
plant and equipment
rectification of the premises
option periods
number of days prior to the expiration of the present lease period in which you have to give notice of exercising a right of an option
how often the building has to be painted?
who pays for repairs and maintenance and refit requirements?
.19If the building is owned by the Vendor, is the building being sold?
If so, obtain details of the building’s written down value (if it is eligible for tax deductible depreciation write-off).
Have a qualified person inspect the building to ascertain its condition.
You should note that repairs and maintenance carried out within 12 months of acquisition is normally not tax deductible.
.20In what name is the building registered?
.21Obtain details of the Title Deed.
.22Check with the Local Council as to the zoning for the premises.
Are there any restrictions on the type of business activities that can be carried out in the building?
.23Ascertain the price the owner wants for the business.
Ask what the apportionment is between land and buildings, plant, fixtures, motor vehicles, stock (if you are taking over) and goodwill.
.24If you are taking over debtors – beware!
Obtain full details of all debtors.
Obtain a detailed Debtors’ Aged Analysis.
Never agree to pay 100 cents in the dollar for Debtors – or if you do, delay payment until you actually receive 100 cents in the dollar.
.25Determine which employees you will be retaining.
Ascertain their period of service.
.26Have a calculation prepared and an appropriate adjustment made for:
Holiday Pay
Sick Leave Entitlements
Redundancy Entitlements
.27If you are acquiring employees who have more than say five years service, have an adjustment made for Long Service Leave Entitlements that will accrue to them after ten years service with the business, not particularly with you.
.28Ensure that you are going to be given an accurate customer list for the business.
Together with details of sales made on an annual basis over the last five years.
.29Enquire as to the intentions of the Vendor.
What are they going to do after selling the business?
Have they any family members operating similar business in close proximity to this business?
.30Will the Vendor stay on with you in the business for a reasonable period to introduce you to the existing customers and to assist in the business changeover?
.31Determine the method of valuing stock.
If possible, insert a clause that you do not have to acquire all the stock, but only the stock that you want.
.32Politics – is legislation likely to change, which will reduce the business activities -
- or increase costs?
(Will this increase in taxes or changed policies have an adverse affect on the business?).
.33If gazetted trading hours change – will this adversely affect the profitability of the business?
.34Are wages stable?
Are wages likely to increase?
Will the staff you are taking over be willing to work for you for the same rates and conditions as they did for the Vendor?
.35What is the state of the economy?
Have the last few years been boom years?
What are the years ahead likely to be – boom or bust?
How will that affect this business?
Can you maintain the profitability?
.36Obtain from the Vendor a month-by-month schedule of sales made in the last five years.
.37Check whether any large Credit Notes were processed in July/August.
This could mean that annual sales to 30th June have been overstated.
.38Have a credit worthiness check run on the business.
Has there been legal action started by or against the Vendor?
.39Are there changes in social behaviour that could affect the business?
e.g. video affects on cinemas, weekend shopping.
.40Will changes in technology affect the business operations or the products or services being sold?
.41Are there any proposed changes in Town Planning Regulations which will affect the business?
It is recommended that you enquire at the Local Council.
.42Who are the customers?
Into what categories do the customers fit?
Age?
Sex?
Education levels?
Income?
Ethnic Group?
Occupation?
Family structure etc?
Are you satisfied that you have the necessary skills, patience and temperament to service the customers of the business?
Is there likely to be any change in the customer mix over the next four years that could affect the operations of the business?
.43Have you reviewed the operation of the business?
Do you believe it is operating efficiently?
If you are proposing changes, have you calculated the realistic cost of these changes?
Have these costs been included in your list of capital requirements?
.44Do you intend to re-employ the present employees?
You should receive a list of their individual job specifications.
Review the work and responsibilities of each of them.
Effective Human Resources Management is vital for he success of every business.
Are you satisfied that you can work with this group of employees?
Examine the employment contracts of these employees – noting any particular clauses or agreements.
Alternatively, are you satisfied that you can hire the necessary employees required?
.45Does the business have the right product mix?
Have you received full details of the sources of:
product
procedures
recipes
formulas etc
.46Does the business operate under any:
patents?
trademarks?
permission to product under license?
copyrights etc?
As a condition of the contract the right to use will have to be transferred to you and the ultimate owner of the “right” will have to agree to the transfer.
.47Check the Order Book.
Do forward order exist?
Check the Gross Profit Margin on the orders – is the percentage similar to that which has been obtained in the past?
Contact some of the customers who have placed orders to ensure that they intend to proceed with the purchase.
.48If you are taking over partially completed contracts – check thoroughly that every thing is satisfactory and that you can complete the order profitably.
.49Obtain a copy of he Creditors’ Aged Analysis.
What are the ages of the outstanding balances?
Does the Creditors’ Analysis “line up” with the suppliers’ terms of trade?
If not, enquire as to why not.  (A significant variation may mean that the business is not operating as well as stated).
.50Check the Bank Reconciliation Statement.
What is the age of unpresented cheques?
Have creditors’ cheques been drawn merely to make the Creditors’ Aged Analysis look satisfactory?
.51Quality Control – is there a system in place?
.52Find out what the stock-buying pattern is for the business.
When do you have to order winter stock or summer stock?
Can you buy specific stock other than at those times?
If so, at what cost?
.53Has the business successfully implemented suitable systems and policies for GST?
.54If you are planning to acquire:
  • shares in a company
  • units in a unit trust; or
  • an interest in a partnership

 

 

 

-    BEWARE!    -

Has the entity made an Interposed Entity Resolution?
In the case of a unit trust – resolved to be a family trust?

 

 

 

 

Remember, what you are looking for are clues that the business is not

what it’s being built up to be by the Vendor or the Agent.

 

The buyer must beware – check, double check and cross check everything!

 

Once you sign the contract – it’s very difficult to renegotiate.

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