A Division of NetworkOfBusiness.com
Learning Center Article

Doing Research for Purchasing a Business

Once you've found a business that you would like to buy, it's important to conduct a thorough, objective investigation. Look into every aspect of the business, verifying whether the owner's stated reasons for selling are legitimate and double-check every detail for accuracy. The following list includes important information you want to include when researching the business you want to buy.

Letter of Intent

A Letter of Intent usually creates a non-binding offer to purchase the business and is usually needed in order for the seller to provide sensitive information about the business.

The Letter of Intent should spell out:

  • The proposed price

  • Terms of the purchase
  • Conditions for the sale of the business

The document should also state that either side may revise the terms or quit the proposed deal for any reason until a binding contract is executed.

Confidentiality Agreement
Often required by the seller, a confidentiality agreement indicates that you won't use the information about the seller's business for any purpose other than making the decision to buy.

Contracts and Leases
It's important to discover all the obligations that the business is subject to, including property leases and equipment leases if there are any. In the case where there is a current lease for the location of the business, be aware that you may have to work with the current landlord to assume any existing lease on the business premises or negotiate a new lease. If you acquire an existing lease from another lessee, you may have to pay the previous lessee for the privilege. The cost of acquiring your lease may be amortized over the remaining term of the lease.

Financial Statements
Examine the financial statements from the business for at least the past three to five years. Also make sure that the statements are accompanied by an audit letter from a reputable CPA firm. Don't accept a simple financial review by the business itself.

Tax Returns
Review the business's tax returns from the past three to five years. This will help you determine the profitability of the business as well as whether any tax liability is outstanding.

Important Documents
Numerous documents should be checked during your investigation. They include:

  • Real and personal property documents

  • Bank accounts

  • Customer lists

  • Sales records
  • Supplier/purchaser list

  • Contracts

  • Advertisement materials

  • Inventory receipts/lists

  • Organization charts

  • Payroll, benefits, and employee pension/profit sharing info

  • Employee roster

  • Certification by federal, state or local agencies

  • List of owners
  • Professional Help
    Buying an existing business is a big decision and hiring professional help is always a good decision for such an important time in your life. A qualified attorney should be enlisted to help review the legal and organizational documents of the business you are planning to purchase. An accountant can help with a thorough evaluation of the financial condition of the business.

    Back To Learning Center