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An Acquired Taste

Before you buy that business, don't just give it a once-over--put it under the microscope.

Are you considering buying an existing business? Whether you use a business broker or go it alone, you will definitely want to put together an "acquisition team"--your banker, accountant and attorney--to help you. These advisors are essential to what is called "due diligence," which means reviewing and verifying all the relevant information about the business you are considering.

The preliminary analysis starts with some basic questions. Why is this business for sale? What is the general perception of the industry and the particular business, and what is the outlook for the future? Does-or can-the business control enough market share to stay profitable? Are the needed raw materials in abundant supply? How have the company's product or service lines changed over time?

You also need to assess the company's reputation and the strength of its business relationships. Talk to existing customers, suppliers and vendors about their relationships with the business. Contact the Better Business Bureau, industry associations, and licensing and credit-reporting agencies to make sure there are no complaints against the business.

If the business still looks promising, your acquisition team should start examining the business's potential returns and asking price. Your assessment of the business's value should take into account issues such as the business's financial health, its earnings history and growth potential, and its intangible assets (for example, brand name and market position).

In addition, get a good idea of the company's anticipated returns and future financial needs by asking the business owner to show you projected financial statements. Balance sheets, income statements, cash-flow statements, footnotes and tax returns for the past three years are all key indicators of a business's health. These documents will help you do some financial analyses that will spotlight any underlying problems as well as give you a closer look at a wide range of less tangible information.

Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need (Entrepreneur Press)

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This article was originally published in the May 2003 print edition of Entrepreneur with the headline: An Acquired Taste.

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