Following is a checklist of items you should evaluate to verify the value of a business before making a decision to buy:

Inventory.

Refers to all products and materials inventoried for resale or use in servicing a client. Important note: You or a qualified representative should be present during any examination of inventory. You should know the status of inventory, what's on hand at present. You need to know what dollar value to assign it. Also, check the inventory for salability. How old is it? What is its quality? What condition is it in? Keep in mind that you don't have to accept the value of this inventory: it is subject to negotiation. If you feel it is not in line with what you would like to sell, or if it is not compatible with your target market, then by all means bring those points up in negotiations.

Furniture, fixtures, equipment and building.

This includes all products, office equipment and assets of the business. Get a list from the seller that includes the name and model number of each piece of equipment. Then determine its present condition, market value when purchased versus present market value, and whether the equipment was purchased or leased. Find out how much the seller has invested in leasehold improvements and maintenance in order to keep the facility in good condition. Determine what modifications you'll have to make to the building or layout in order for it to suit your needs.

Copies of all contracts and legal documents.

Contracts would include all lease and purchase agreements, distribution agreements, subcontractor agreements, sales contracts, union contracts, employment agreements and any other instruments used to legally bind the business. Also, evaluate all other legal documents such as fictitious business name statements, articles of incorporation, registered trademarks, copyrights, patents, etc. If you're considering a business with valuable intellectual property, have an attorney evaluate it. In the case of a real-estate lease, you need to find out if it is transferable, how long it runs, its terms, and if the landlord needs to give his or her permission for assignment of the lease.

Incorporation.

If the company is a corporation, check to see what state it's registered in and whether it's operating as a foreign corporation within its own state and is in good standing with the state it is incorporated in.

Tax returns for the past 2-3 years.

Many small business owners make use of the business for personal needs. They may buy products they personally use and charge them to the business or take vacations using company funds, go to trade shows with their spouses, etc. You have to use your analytical skills and those of your accountant, to determine what the actual financial net worth of the company is

Financial statements for the past 2-3 years.

Evaluate these statements, including all books and financial records, and compare them to their tax returns. This is especially important for determining the earning power of the business. The sales and operating ratios should be examined with the help of an accountant familiar with the type of business you are considering. The operating ratios should also be compared against industry ratios which can be found in annual reports produced by Robert Morris & Associates as well as Dun & Bradstreet.

Sales records.

Although sales will be logged in the financial statements, you should also evaluate the monthly sales records for the past 24-36 months. Break sales down by product categories if several products are involved, as well as by cash and credit sales. This is a valuable indicator of current business activity and provides some understanding of cycles that the business may go through. Compare the industry norms of seasonal patterns with what you see in the business. Also, obtain the sales figures of the 10 largest accounts for the past 12 months. If the seller doesn't want to release his or her largest accounts by name, it's fine to assign them a code. You're only interested in the sales pattern.

Complete list of liabilities.

Consult an independent attorney and accountant to examine the list of liabilities to determine potential costs and legal ramifications. Find out if the owner has used assets such as capital equipment or accounts receivable as collateral to secure short-term loans, if there are liens by creditors against assets, lawsuits, or other claims. Your accountant should also check for unrecorded liabilities such as employee benefit claims, out-of-court settlements being paid off, etc.

All accounts receivable.

Break them down by 30 days, 60 days, 90 days and beyond. Checking the age of receivables is important because the longer the period they are outstanding, the lower the value of the account. You should also make a list of the top 10 accounts and check their creditworthiness. If the clientele is creditworthy and the majority of the accounts are outstanding beyond 60 days, a stricter credit collections policy may speed up the collection of receivables.

All accounts payable.

Like accounts receivable, accounts payable should be broken down by 30 days, 60 days, and 90 days. This is important in determining how well cash flows through the company. On payables more than 90 days old, you should check to see if any creditors have placed a lien on the company's assets.

Customer patterns.

If this is the type of business that can track customers, you will want to know specific characteristics concerning current customers, such as: How many are first-time buyers? How many customers were lost over the past year? When are the peak buying seasons for current customers? What type of merchandise is the most popular?

Marketing strategies.

How does the owner obtain customers? Does he or she offer discounts, advertise aggressively, or conduct public-relations campaigns? You should get copies of all sales literature to see the kind of image that is being projected by the business. When you look at the literature, pretend that you are a customer being solicited by the company. How does it make you feel? This can give you some idea of how the company is perceived by its market.

Advertising costs.

Analyze advertising costs. It is often better for a business to postpone profit at year-end until the next year by spending a lot of money on advertising during the last month of the fiscal year.

Industry and market history.

You should analyze the industry as well as the specific market segments of the business targets. You need to find out if sales in the industry, as well as in the market segment, have been growing, declining, or have remained stagnant. This is very important to determine future profit potential.

Location and market area.

Evaluate the location of the business and the market area surrounding it. This is especially important to retailers, who draw the majority of their business from the primary trading area. You should conduct a thorough analysis of the business's location and the trading areas surrounding the location including economic outlook, demographics and competition. For service businesses, get a map of the area covered by the business. Find out, based on the locations of various accounts, if there are any special requirements for delivering the product, or any transportation difficulties encountered by the business in getting the product to market.

Reputation of the business.

The image of the business in the eyes of customers and suppliers is extremely important. As we mentioned, the image of the business can be an asset, or a liability. Interview customers, suppliers and the bank, as well as the owners of other businesses in the area, to determine the reputation of the business.

Seller-customer ties.

You must find out if any customers are related or have any special ties to the present owner of the business. How long has any such account been with the company? What percentage of the company's business is accounted for by this particular customer or set of customers? Will this customer continue to purchase from the company if the ownership changes?

Inflated salaries.

Some salaries may be inflated or perhaps the current owner may have a relative on the payroll who isn't working for the company. All of these possibilities should be analyzed.

List of current employees and organizational chart.

Current employees can be a valuable asset, especially key personnel. Evaluate the organizational chart to understand who is responsible to whom. You must also look at the management practices of the company and know the wages of all employees and their length of employment. Examine any management-employee contracts that exist aside from a union agreement, as well as details of employee benefit plans; profit-sharing; health, life and accident insurance; vacation policies; and any employee-related lawsuits against the company.

OSHA requirements.

Find out if the facility meets all occupational safety and health requirements and whether it has been inspected. If you feel that the seller is "hedging" on this and you see some things you feel might not be safe on the premises, you can ask the Occupational Safety and Health Administration (OSHA) to help you with an inspection. As a prospective buyer of a business that may come under OSHA scrutiny, you need to be certain that you are not buying an unsafe business. Some sellers may perceive your asking for OSHA's help as a dirty trick. But you must realize that as a prospective, serious buyer, you need to protect your position.

Insurance.

Establish what type of insurance coverage is held for the operation of the business and all of its properties as well as who the underwriter and local company representative is, and how much the premiums are. Some businesses are underinsured and operating under potentially disastrous situations in case of fire or a major catastrophe. If you come into an underinsured operation, you could be wiped out if a major loss occurs.

Product liability.

Product liability insurance is of particular interest if you're purchasing a manufacturing company. Insurance coverage can change dramatically from year to year, and this can markedly affect the cash flow of a company.

Deciding on a price, however, is just the first step in negotiating the sale. More important is how the deal is structured. You should be ready to pay 30 to 50 percent of the price in cash, and finance the remaining amount.You can finance through a traditional lender, or sellers may agree to "hold a not," which means they accept payments over a period of time, just as a lender would. Many sellers like this method because it assures them of future income. Other sellers may agree to different terms--for example, accepting benefits such as a company car for a period of time after the deal is completed. These methods can cut down the amount of upfront cash you need; You should always have an attorney review any arrangements for legality and liability issues.

An individual purchasing a business has two options for structuring the deal (assuming the transaction is not a merger). The first is asset acquisition, in which you purchase only those assets you want. On the plus side, asset acquisition protects you from unwanted legal liabilities since instead of buying the corporation (and all its legal risks), you are buying only its assets.

On the downside, an asset acquisition can be very expensive. The asset-by-asset purchasing process is complicated and also opens the possibility that the seller may raise the price of desirable assets to off-set losses from undesirable ones. The other option is stock acquisition, in which you purchase stock. Among other things, this means you must be willing to purchase all the business assets--and assume all its liabilities.

The final purchase contract should be structured with the help of your acquisition team to reflect very precisely your understanding and intentions regarding the purchase from a financial, tax and legal standpoint. The contract must be all-inclusive and should allow you to rescind the deal if you find at any time that the owner intentionally misrepresented the company or failed to report essential information. It's also a good idea to include a no compete clause in the contract to ensure the seller doesn't open a competing operation down the street.

Remember, you have the option to walk away from a negotiation at any point in the process if you don't like the way things are going. "If you don't like the deal, don't buy. "Just because you spent a month looking at something doesn't mean you have to buy it. You have no obligation.

Short on cash? Try these alternatives for financing your purchase of an existing business.

Use the seller's assets.

As soon as you buy the business, you'll own the assets--so why not use them to get financing now? Make a list of all the assets you're buying (along with any attached liabilities), and use it to approach banks, finance companies and factors (companies that buy accounts receivable).

Buy co-op.

If you can't afford the business yourself, try going co-op--buying with someone else that is. To find a likely co-op buyer, ask the seller for a list of people who were interested in the business but didn't have enough money to buy. (Be sure to have your lawyer write up a partnership agreement, including a buyout clause, before entering into any partnership arrangement.

Use an Employee Stock Ownership Plan (ESOP).

ESOPs offer you a way to get capital immediately by selling stock in the business to employees. If you sell only non-voting shares of stock, you still retain control. By offering to set up an ESOP plan, you may be able to get a business for as little as 10 percent of the purchase price.

Lease with an option to buy.

Some sellers will let you lease a business with an option to buy. You make a down payment, become a minority stockholder and operate the business is if it were your own.

Assume liabilities or decline receivables.

Reduce the sales price by either assuming the business's liabilities or having the seller keep the receivables.

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