Buying a Business

What To Look For When Buying A Business

By November 10, 2020 February 16th, 2021 No Comments

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What do you look for when buying a business? There are so many things to consider, the first thing you want to do is get advice from a broker who does this as a fulltime job. You want to dive into the company’s finances and legal documents. With this said, you should have a ton of questions regarding day-to-day operations from the front door to the back door. Let’s get started. You’ve identified a business that is up for sale through a friend, a business listing or a broker. You should be starting to have many questions, such as what are the owners plans, what kind of growth potential is there, why are they selling, what are the details on the P&L’s, how much do I need to put down and how do I structure my offer?

Retention of key employees is critical. You might make it a condition of the sale, if you can’t retain key employees then you might have bigger issues that can be seen. Some salary compensation, equity or even a new title might sweeten the pot and entice them to stay and help grow the newly acquired company. Furthermore, the retained employees will have intimate knowledge of day-to-day operations, employee issues and detailed customer information, all giving value to you as the new owner. Having current owner and/or key employees remain with the company for some amount of time might ensure continuity and flow of operations and allow you to get comfortable with the details of the operations through informed eyes. Most if not all the existing employees will stay. Changing jobs is a big decision and will require more than this to convince them to leave, that is of course unless you give them reason. Best advice is do not change anything for a few months. Let everyone get used to each other, then share your vision and build your team accordingly

Additionally, inquire if the seller owns or leases their current building. Will you be able to continue the lease or renegotiate the terms of the lease after the sale? What equipment does the company own? Is there any leased equipment? Where do they spend marketing dollars? Are there any vendor contracts? All good questions to be asked and certainly answered prior to making a buying decision.

If the business you are buying has outstanding or unpaid payroll taxes, sale taxes or property taxes, will you assume these liabilities? As a broker, our recommendation is to secure written confirmation of any outstanding taxes having been paid or not and make sure there are no liens on the property. You want to purchase this company with a clean slate.

What prepaid expenses exist, and will they be pro-rated before completion of the sale? Digital media has such a large footprint in our personal and professional lives. Any marketing, advertising, or SEO services in place, and if so, will they continue under current contracts? Ask the current owner for a list of all agreements, subscriptions, memberships and contracts to determine if these will be pro-rated, cancelled or continued upon the business sale.

Accounts receivable (AR) is also an issue that should be sorted out before the closing day. How much AR exists and who is going to collect it. Will you as the new owner collect or will the previous owner still get paid for some portion of remaining amount? If you negotiate to pay for the AR, will the current owner sell it to you at a discount since there is no guarantee of collecting it as the new owner? Either way, during the due diligence phase you really need to determine how the AR & AP will be managed.

These are just a few of the questions to be asked when deciding to make an offer to purchase a company, you can certainly see how lengthy the process is. Be exhaustive, be diligent and don’t assume anything conveys at closing. After all, you are probably paying a hefty sum of money and incurring a liability like nothing you have experienced before. If you have questions, Valhalla Business Brokers will have the answers or we know how to get them.

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