4 Things To Know When Buying a Business

Let’s talk steps to due diligence

How do you know if you should actually acquire a company?

You find out through a process called “due diligence.”

To see if the company is something you really want purchase, you have to learn the company inside and out.

Overall, the best way to decide, especially in small business acquisitions, is to get IN the business and evaluate operations first hand.

Get in the nitty gritty of the company. Through ground-level exposure, you’ll learn the pros and cons to the business for yourself.

That being said, there are 4 major contributors to consider before purchasing a company that are ESSENTIAL to your due diligence process…

1. Product Market:

The first step is to understand the industry you’ll be entering and what the future of it looks like.

Is this industry dissolving?? Is the product or service projected to become obsolete in the near future?

For example: Acquiring a company like Dish right now would not make a lot of sense… everyone’s going cordless! With competitors like Netflix and Disney Plus, its obvious there’s already been a huge industry pivot.

These are all types of things you’ll need to find out BEFORE making any investment decision.

Knowing which companies would be your largest competition and some major keys to success within that industry will help you make a more informed decision.

2. Management:

The next imperative consideration to observe is the company’s management.

What type of people are in the business? What is the relationship between employees and management??

If you’re not going to run the business, who is? You need to know who the management is and how long they intend to stay with the company.

On top of that, take precautions by setting up the deal for exceptions in case management leaves earlier.

DO NOT just take their word for it!

For example: If you decide to go with the manager that’s currently employed, you can add a concession in the agreement.

Create a clause that specifies that if the manager quits earlier than X amount of years, you will be reimbursed 5% of the purchase price to find a new manager ect.

Remember: at this point you have just expressed intention to acquire the business… you haven’t sealed the deal yet! Negotiations are still happening.

Everything in a deal needs to be documented. Make sure to get an attorney!

3. Financials:

Knowing the fiscal history of the business you’re intending to acquire is an obvious important step in the process.

However, this should not be a surface-level assumption.

Look back at the history of the company.

Maybe they’ve had 10 yrs of fantastic profitability and then a really poor last couple of quarters…

Understand the reason behind the decrease in revenue.

Dissect the intentions of the seller and make sure that they aren’t selling just to get out of a failing industry.

Taking time to understand the accounts and projections of the company will pay off big time.

Helpful tip: Part of my course teaches you how to complete a Discounted Cash Flow (DCF) model and provides you with a template. This will help you evaluate the future of the company without having your CPA!

Look at a company from all angles.

4. Risk:

When considering risk, you need to think worse case scenarios. What could go wrong??

But also think BEST case scenarios!

This will help you determine how risk-tolerant and loss-averse you are.

You never know, the company may be underappreciated.

And YOU might have just the right strengths to dramatically increase the value of the company!

It’s okay if all the aspects of the company aren’t perfect…because that’s where you’ll come in!

Look for ways you, and your abilities can improve the business.

Don’t forget…

If the deal isn’t completely right yet, leave on a positive note.


Tell them maybe not today, but you still want to keep a strong relationship.

Leaving on bad terms is probably this worst thing you can do!

Pro tip: Practice negotiating! There’s always another deal. Get your hands dirty and get down to work!

You’ll get better with each one, I promise.

Bridger Pennington

DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the autho

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