Buying a Business: The Role of Record Keeping

Buying a business, next to buying a house, is one of the largest investments you will ever make. A lot of thought and due diligence must go into the process before you conclude the deal.

When choosing to buy an existing company, there is a expectation to have a return on investment. Even more so, you want to make money, not just recoup your investment.

Your confidence in the transaction is directly linked to the company’s financial records, employment records, and legal standing. Reviewing these documents, with the help of a good business attorney, will put you in a better position to make an informed business decision. Will you buy the business or not? Let’s go over how good records can ease the process of buying a business.

What Good Business Records Look Like

Maintaining proper business records should be a top priority for any business owner. Even a business owner who doesn’t have any plans of selling their business should nevertheless make it a point to maintain complete, adequate, and up-to-date financial and other records.

Properly kept records allow a business owner to stay on top of their company’s financial status, growth opportunities and rate, potential risks and threats, and more. It may also play a critical role in legal and regulatory compliance which can reduce the risk of sanction or litigation.

In the context of a business sale, properly kept records are:

• Financial Records: Understand the value and health of a business. This means you are looking for accurate accounting / bookkeeping, up-to-date tax filings, and any loans are being paid on time.
• Employment Records: Determine whether the business struggles with issues such as high employee turnover or low employee engagement. Ensure employees are being paid and you are not opening yourself up to liability.
• Legal Records: Ensure the business is up to date on requires state filings, taxes, and licensure. Specifically for licensing, if the business does not have a clean record, it may hinder you as the new business owner in getting the same license.

All in all, you need to gather a sufficient amount of information to make an informed decision regarding whether to proceed with the business purchase or not. If a seller hasn’t maintained some of these records, it may be a red flag.

How To Evaluate Records When Buying a Business

Now that you have the business’s records, how do you know what to look for?

If you don’t have the answer to that question, it is probably time to hire a professional.

Hiring a bookkeeper is great to help you parse through financials. The bookkeeper can take a look at how the financials are tracked and spot any inaccuracies.

Hiring an attorney is great for helping you evaluate employment and legal records. The attorney can review the corporate documents and employment agreements. This will help determine if there are any sources of potential legal issues in the future.

If you are opposed to hiring help, then you will need to be sure you have educated yourself. Learn enough about business to make savvy business decisions.

A very shortlist of some business records that you should investigate in the due diligence process includes the following:

• Financial Records: Look for consistent revenue and cash flow when reviewing financial records. Also take a look at any contracts, bills, or loans being paid. Additionally, it’s important to confirm the validity of tax returns.
• Employee Records: Review the employment agreements for any employees. Look at the record of past employees and keep an eye out for signs of employee issues like high turnover or contractual disputes. If you plan to implement a new system to operate the business, it can be difficult to make systematic changes if the business can’t keep employees.
• Legal Records: Ensure a business has all necessary licenses and complies with relevant laws and regulations. Records may indicate a business has been involved in litigation, regulatory violation, or other such legal matters. Any past problems can lead to future issues in licensing and litigation.

Your goal is to confirm that the business has strong financials, a consistent employee base, and no past or pending legal issues.

How Business Records Should Influence Decision Making

The records that the seller of a business provides, should be the cornerstone of your purchasing decision.

Here are a few common examples of how records could impact your decision-making:

• A company’s past financials can help you determine if buying the business is a smart monetary investment.
• Reviewing financial records provide you with leverage to negotiate for a more favorable price.
• Business records can help you identify strategies that have worked for the business, like sales during specific time periods.

At the end of the day, the decision to buy the business is yours alone to make. You can review the documents with or without a professional; however, the decision comes down to you.

Buy The Business or Don’t Buy The Business

Ultimately, the information you gain from records should be the key factor when deciding on buying a business. For example, the business may have a sharp decline in revenue evidenced in their financials. This should weigh into your decision to proceed with the transaction.

Remember, you don’t have to make this decision individually. You should find experts to help you interpret the information given. The experts can’t make the decision for you, but can make the path forward much clearer for you.

Business is always a risk, and buying an existing business can be a way to either mitigate some risk, or take on even more. So how do you know the risk you are taking on? The answer is in the records.