Once you've found a business that you would like to buy, it's important to conduct a hard, objective investigation. Look into every aspect of the business, verifying whether the owner's stated reasons for selling are legitimate; double check every detail for accuracy.

Professional Help 
Among the things to worry about when you buy an existing business are undisclosed debts, overstated earnings, poor employee relations, overvalued inventory and pending lawsuits, to name a few. Hidden liabilities can exist in all sorts of areas - from land contaminated with toxic chemicals, to accounts receivable that look solid but prove to be uncollectible, to inventory that's defective or dated. A business-savvy attorney should be on your team for all but the smallest business acquisitions. A lawyer can represent you or simply act as your coach. He or she can act as an escrow agent or recommend a company to handle the exchange of money for the enterprise you're acquiring. Some attorneys are not as familiar with the tax aspects of business transfers as others, so it may be a good idea to run the deal by a tax professional as well.  An accountant can help do a proper evaluation of the financial condition of the business. If you are buying a business for more than the value of its "hard" assets, consult with a business appraiser. If you can, find someone with experience in valuing businesses in the same industry.

Letter of Intent and Confidentiality Agreement 
A letter of intent usually creates a non-binding offer to purchase the business and is usually needed in order for the seller to provide sensitive information about the business. It should spell out the proposed price, terms, and conditions for the sale of the business. The letter should also state that either side may revise or quit for any reason.

Often required by the seller, a confidentiality agreement indicates that you won't use the information about the seller's business for any purpose other than making the decision to buy.

Contracts and Leases 
It's important to discover all the obligations to which the business is subject. Also be aware that you may have to work with the current landlord to assume any existing lease on the business premises or negotiate a new lease. If you acquire an existing lease from another lessee, you may have to pay the previous lessee for the privilege. The cost of acquiring your lease may be amortized over the remaining term of the lease.

Financial Statements and Tax Returns 
Examine the financial statements from the business for at least the past three to five years. Also make sure that the statements are accompanied by an audit letter from a reputable CPA firm. Don't accept a simple financial review by the business itself. Also be sure to review the business' tax returns from the past three to five years. This will help you determine the profitability of the business as well as whether any tax liability is outstanding.

Important Documents 
Numerous documents should be checked during an investigation. They include:

• Real and personal property documents
• Bank accounts
• Customer lists
• Sales records
• Supplier/purchaser list
• Contracts
• Advertisement materials
• Inventory receipts/lists
• Organization charts
• Payroll, benefits, and employee pension/profit sharing info
• List of employees
• Certification by federal, state or local
• List of owners

Buying a Business in a Nutshell

• You and the seller must assign a value to all business assets transferred and report it to the IRS.
• You can write off goodwill and other intangible business assets you purchase over 15 years.
• Beware of outstanding tax liabilities, always check for tax liens, and require the seller to agree to indemnify you for any tax debts attaching to assets you're buying.
• There is no federal tax on the purchase of a business, but states and localities may impose transfer taxes. 

References:
• Small Business Administration

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