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Buying
another business is an easy way to expand your own business. But the
decision should never be made without a thorough investigation of the
business and a look at your own resources. Each business must be evaluated,
and the operation's merits or any liabilities you discover should be taken
into consideration before making a purchase decision.
Before
even evaluating a business, it’s important to establish a step-by-step
process in deciding how to purchase an existing business. Whenever possible,
access and examine all existing corporate documents, from the simplest
(fictitious name registration) to the more complex (articles of
incorporation). Remember this is very important information and may be
written in legaleeze. When in doubt, hire a lawyer who specializes in the
incorporation process to examine all these documents.
Before
going to an attorney, access and review annual financial statements for the
last three years and the last six consecutive months. Financial statements
you should review include balance sheets, income and cash flow statements.
If you are planning on seeking financing in order to purchase the business,
you will need to furnish these documents to the lender when you apply for a
loan. If you have little or no understanding of financial statements, be
sure to hire a trusted accountant who can help you through the process. Your
accountant may also be able to recommend a good lawyer.
Be
sure to get a list of all accounts payable and receivable. Your accountant
will also need to assess the days payable and days receivable on those
accounts. This just means the average amount of time, in days, that it takes
to collect accounts and the average number of days it takes to pay the
bills. This is something your potential lender will want to see as
well.
Remember
to also get a list of all fixed assets owned by the corporation, including
original purchase price, purchase date, method of depreciation and
accumulated depreciation to date. Any lender will want to see this
information before deciding to finance a loan. Additional considerations
lenders take into account include how long (or short) a time you have been
practicing, what is the asking price for the business, how does the asking
price compare to the business’ value, and how much of the total cost do
you need to borrow. Lenders will also look at your personal credit rating,
your demonstrated ability to run your own business, and your business
plan.
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