Transferability is the Key to a Successful Purchase

There are many questions to be answered by  a prospective buyer when considering the purchase of a business, a few of the most important being:

• Is it a good fit for their interests and skills?
• Does it generate enough cash flow (adjusted earnings) to cover the debt service expense and personal living expenses?
• What are the recent historical trends of the business and what are the realistic expectations for the future?
• Is the information provided accurate?

The next level of due diligence is all about determining the transferability of key elements of the business.  These critical elements include:

• What happens when the current owner leaves? Does the owner have all the institutional knowledge of the business in their head or are processes and procedures memorialized electronically and/or in paper form?  Do they own the customer relationships?  Are they the key employee?
• Is there a level of management or supervisors whom the buyer can rely on to assist in the transition?
• What is the likelihood the employees will stay if the status quo is maintained or is improved?
• What is the likelihood the customers will continue to purchase goods or services from the business after the transition to the new owner? Do employees have strong connections to customers that should ensure the continuity of the relationship if the quality of the products and services are maintained?
• How committed is the current owner going to be to the transitioning of customer relationships, business knowledge and credentialing of the new owner to employees?

These issues should be a primary focus of discussions with the owners during initial meetings and deeper due diligence.  There isn’t anything more important than making sure the cash flow of the business can be maintained and each of the elements above help to ensure that happens or raises red flags of heightened risk.

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