Armen Nazarian Explains How to Investigate a Business for Sale

Before deciding to buy a business, do your homework. The process of investigation begins after a short list of potential businesses to buy has been compiled.

“It’s not hard to do,” said Armen Nazarian, business broker at Capital 1 Business Brokers in Farmington Hills, Michigan. “Use the Internet and social media to learn about prospects. Talk to people with similar businesses and ask them things like why the owner is selling, what’s the reputation of the business, what’s the future outlook, and whether the company has sizable market share to remain profitable.”

Follow information trails, taking notes as you go. After preliminary exploration, negative reviews may surface for some of the prospects on the list, which narrows the options. Meet the owner of the business when the short list has been chiseled down to one or two companies that will likely stand up to deeper investigation. Start the due diligence process with the goal of making sure the company is worth buying.

Here’s a checklist Nazarian suggests for investigating a business for sale:

• Verify the business name, address and contact numbers through the Better Business Bureau.
o Are there complaints against the company? Check with the Securities & Exchange Commission if the company is publicly listed. Identify the business owners. Search for published articles about the company and its owners or principals on the Internet and in local newspapers. Public information is available from state repositories in the state’s capitol for corporations, partnerships and sole proprietorships.
o If principals or key employees are required to have professional licenses, check the status of their licenses with the Department of Business and Professional Regulation. Check with the issuing licensing agency to find out if the licenses or permits are valid and up to date.
o A corporation is assigned a FEIN or Federal Employer Identification Number that can easily be traced. Find out if the company is active and current in filing its yearly documents as required by law.

• Make sure all assets have clear titles, and all equipment is in working order and has been recently inspected. Real estate assets can be verified in the county’s assessor’s office, and motor vehicles with the Department of Motor Vehicles.

• Review three to five years of financial history to get an idea of the company’s overall performance. Study profit and loss statements, balance sheets, accounts receivable, accounts payable, tax returns, vendor invoices, bank statements, payroll and sales files, employee files, equipment maintenance documents, and any other important data.

• Get a sense of the company’s reputation in the community or industry. Talk to landlords, vendors, neighbors and customers to find out if the company has had positive dealings with these parties. Find out about complaints and timely payment of obligations. Check the local chamber of commerce and industry or trade associations.

• Give careful consideration to location. Examine potential threats to the business from competitors, especially those in the vicinity. Go to the city’s planning department to find out if future road or building construction projects are planned that may decrease foot or vehicle traffic, or if a large competitor is looking to build in or near the area. Review existing or pending regulations that may affect the business.

• Look into any potential legal issues. Examine county court records related to any judgments or liens against the business owner. State records include UCC (Uniform Commercial Code) filings that contain financial information. Check court records and the Department of Corrections to determine if the principals have criminal records.

“Most records can be accessed for free online or for a fee charged by agencies and information providers to facilitate a business investigation,” Nazarian said. “At Capital 1 Business Brokers we strongly recommend hiring a business appraiser, lawyer, broker and accountant to help prospective buyers source and interpret the necessary information and make sound decisions.”