Starting a new business from scratch requires a lot of work and expense, so for many entrepreneurs buying an existing business is more appealing. An established customer base, employees and suppliers, and the notion that someone has already done all the heavy lifting, are just a few of the reasons “pre-owned” can rival “new.”
But buying an existing business is still a complex process. Typically, potential buyers have preliminary discussions about terms of the sale with the seller. After a preliminary agreement is reached between buyer and seller, a Letter of Intent, or LOI, is often the next step. The LOI sets forth the rudimentary terms of the deal and establishes confidentiality. It also establishes whether the seller has to deal with you exclusively during the next phase, or if he can entertain other offers.
Following the LOI, you will need to do your homework, or conduct “due diligence.” Due diligence is a detailed review of the business that will help you uncover potential problems. Consequently, you will want to review and verify all of the information the seller has provided to you. The items you will need to review include the record book, historical and current financial data, tax returns, business plans, minutes of directors’ and shareholders’ meetings, all contracts with suppliers and customers, and all information relating to employees and contractors.