Venturing into business ownership is an exciting step, but buying a business requires careful financial due diligence. If you’re a first-time entrepreneur or a seasoned investor in Tacoma, Pierce County, or the greater Puget Sound region, asking the right questions can help you avoid pitfalls and ensure a smooth transition.

Here’s a checklist of financial items to consider before making that investment.

1. What Do the Tax Records Tell You?

Tax records are a treasure trove of information about a business’s financial health. Request at least three years’ worth of tax returns to verify revenue claims, expenses, and overall profitability. Look for trends—are profits growing, stagnating, or declining? Comparing tax records with financial statements can help identify discrepancies.

2. What Are the Business’s Liabilities?

It’s crucial to understand what the business owes. Ask for a detailed list of liabilities, including loans, accounts payable, and any outstanding legal or tax issues. This information will help you assess the financial risks involved and whether those liabilities transfer to you as the new owner.

3. How Stable Is the Revenue Stream?

Analyzing revenue trends is essential to understanding the business’s ability to generate consistent income. Look for seasonality, recurring revenue, and dependency on a few key clients. If a significant percentage of revenue comes from one or two clients, losing them could pose a major risk.

4. What Are the Profit Margins?

Gross and net profit margins reveal the efficiency and profitability of the business. Compare these metrics to industry standards to see if the business is performing competitively. High margins could indicate efficiency, while unusually low margins might point to inefficiencies or underpricing.

5. Are There Any Pending Legal or Financial Issues?

Unresolved legal disputes or financial obligations can become your headache after purchase. Ask for full disclosure on lawsuits, unpaid taxes, or regulatory violations. Consult a business attorney to help identify potential red flags.

6. What Assets Are Included in the Sale?

Determine which assets—both tangible and intangible—are part of the purchase. Tangible assets might include inventory, equipment, or real estate, while intangible assets could include intellectual property, customer lists, and goodwill. Verify ownership of these assets and ensure they are free of liens or disputes.

7. What Do the Operational Costs Look Like?

Understanding the cost structure of the business is critical. Review expenses like payroll, rent, utilities, and marketing. Are there opportunities to streamline operations and improve profitability? Unexpected costs could eat into your profits post-purchase.

8. What Is the Seller’s Reason for Selling?

While not strictly financial, understanding the seller’s motivation can provide context about the business’s future prospects. Is the owner retiring, or are they exiting due to declining sales? A thorough explanation from the seller can guide your decision-making.

9. Have You Consulted Local Experts?

Buying a business in Tacoma comes with unique opportunities and challenges. Partnering with local financial advisors, accountants, and attorneys who understand the area’s market dynamics can give you an edge. Local expertise can also help you navigate Tacoma’s regulations and tax landscape.

10. What Is Your Post-Purchase Plan?

Before signing on the dotted line, have a clear vision for the business. Will you maintain the current operations, or do you plan to make changes? A well-thought-out plan can make the transition smoother and set you up for success.

Local Resources in Tacoma

Tacoma offers a variety of resources for entrepreneurs and business owners, from The City of Tacoma’s Community Reinvestment Project to local networking events. Leverage these resources to gain insights and connect with other business professionals.

Buying a business is a significant investment, but asking the right financial questions can pave the way for a rewarding ownership experience. Ready to make your move with confidence? Contact J. Ott Business Solutions today for expert guidance and tailored support every step of the way!