Checklist of Questions to Propound for Purchase of a Professional Business

A professional business is any business that requires a license from either the state or federal government granted to the owner to operate the business. A person without the license is not only barred from owning the business, but may face criminal penalties if he or she seeks to engage in that business without the license. Unlike business licenses which are primarily used to obtain tax revenues by the state or county, the professional license normally requires passing a qualifying examination and often years in the profession before the holder can employ others.

Examples in California of professional businesses are medical practices, law practices, dental practices, real estate brokerages, financial advisors, architects, engineers, insurance brokers, appraisers, etc.

Each such industry is, of course, unique, and you will need expert legal and tax advice to consider its value. However, each purchase of a professional entity does have certain areas that must be investigated, as listed below, and your review of such a business must use different criteria than the criteria one would use to buy a retail or wholesale business which sells products. Such assets as reputation in the community, trends in client growth, alterations in the professional field which may alter the practice, particular expertise of an employee or assistant that make the practice stand out - but which could be changed if the employee quits..are all vital to understand.

For instance, fifteen years ago medical practices became of minimal value almost overnight due to a remarkable raise in medical malpractice insurance rates. Imagine a doctor who had purchased a practice a month before the premiums ran up! A change in the law may make a workers compensation attorney's practice of no value when signed by the governor. An innovation in technique may make the skills of your employees in an entomologist practice of such little value that you must spend tens of thousands retraining them. It is clear that in addition to the traditional financial information one must obtain in purchasing any business, one must confront additional concerns when purchasing a professional practice.

One must educate oneself as to the current state of the profession and any likely alterations in the practice before one begins to investigate any particular practice. Ideally, one would have been practicing in the same community - or even within the same practice one hopes to purchase. Self education as to the professional condition in the locale is the first step in determining what business to purchase.

For the purpose of this checklist, it is assumed that you, as the buyer, have already investigated the license requirements for your profession, have the requisite license or are legally connected to someone who does. Many professional businesses require particular licenses from the State by the owners, regardless of who the employees are, and the licensing agency should be contacted to determine if this requirement pertains. It is vital to determine if a professional license is required to own such a business before making an offer. Many businesses do NOT allow a nonlicensed person to even hire licensed employees to run it. Be sure to determine from the owner what professional licenses he or she has BEFORE making an offer and decide if you want to go through the process of obtaining a license for yourself. Most licenses may take a year or more to obtain, requiring an examination (such as real estate or becoming a certified public accountant) or some experience in the field in addition to the state run examination (subcontractors, etc.) Such professions as medical, dental, law or engineering often require many years of schooling.

If you are purchasing the business with others or have assets to protect, be sure to obtain legal advice on the creation of corporations and/or partnerships. Certain professions, however, require personal guaranties from the owners to the clients or patients even if incorporated. For example, attorneys in California who own a professional corporation must execute guaranties in favor of their clients according to Bar Rules.

The nonprofessional/licensed. businesses normally only require a business license to operate and that is available to anyone who pays the license fee. Few businesses do not require either experience or training in the field and the wise business person will either work in the field as an employee for a year or two to learn the profession or insist on several months training from the prior owner as part of the purchase arrangement.

Do not confuse being a professional with being a business owner. The skills are entirely different, require training and great amounts of time, and it is quite common to find an excellent doctor or lawyer who is a terrible business person. If you intend to purchase a practice, be sure to mentally commit yourself to either learning the business skills required or hiring a business manager who can do the business side of the practice.

A calm and careful review of the market and the likely future of the business and its history before significant money is invested is the FIRST step in any future business. To start from scratch is even more difficult, often requiring the purchase of many tools of the trade new and that can be expensive. For that reason, most people buy an existing business rather than begin their own, though they often alter the methods and look of the operation.

But the most important rule to remember in buying a business is this; WHILE YOU ARE BUYING IT, SOMEONE ELSE IS SELLING IT AND THERE MUST BE A REASON WHY THEY WANT TO SELL: YOU MUST FIND OUT THAT REASON AND CONFIRM IT SO YOU CAN DETERMINE IF IT STILL MAKES SENSE FOR YOU TO OWN IT OR YOU ARE SIMPLY BUYING WHATEVER PROBLEM THEY HAVE THAT IS MAKING THEM WANT TO SELL

The investigation of whether a business is worth buying is a vital part of your beginning your own business and should not be hurried or glossed over no matter how attractive the business looks at first glance or how much pressure the seller is putting on you to "buy right now." You must carefully and professionally review the history, financial records, and operations of the business BEFORE you make the offer, as discussed in detail below, and then you must review their records to make sure the facts given to you are true.

You also are going to need advice from competent professionals such as attorneys and CPAs to check the figures and make sure the purchase contract protects you. DO NOT RELY ON THE STANDARD BUSINESS BROKER CONTRACT which too often only protects the broker and his or her fees rather than the parties. YOU NEED A FULLY REVIEWED WRITTEN PURCHASE CONTRACT AND ADVANCE ADVICE FROM BOTH AN ATTORNEY AND CERTIFIED PUBLIC ACCOUNTANT BEFORE YOU MAKE YOUR OFFER. THIS IS TRUE OF ANY BUSINESS AT ANY TIME, EVEN IF YOU ARE BUYING IT FROM A MEMBER OF THE FAMILY: INDEED, SUCH REVIEW IS MORE IMPORTANT IF YOU KNOW THE OWNER ALREADY SINCE IF THE DEAL GOES BADLY, IT CAN DESTROY FRIENDSHIPS AND FAMILIES.

And to save money, obtain the following information about the business BEFORE going to the professionals since, if they are experienced and good, they will need to know the following information about any professional business before they can advise you as to the purchase:

BASIC FACTS OF THE PROFESSIONAL BUSINESS YOU INTEND TO BUY:

You should know the following facts BEFORE you make your offer: these are the questions you must have answered by the Seller.

1. Current overall condition of the professional practice in the local area. Trends in terms of clients/patients and in the specialized field. (Local licensing and professional associations are good locations to determine such information: newsletters are rife with warnings and complaints about the government licensing problems in most such newsletters.)
2. Ownership Structure of the business you are thinking of buying. (Corporate? Partnership? Who owns it and who used to own it?)
3. What professional licenses are required? Which employees have them and what continuing education is required and its cost? Employment agreements with each such employee must be reviewed.
4. Will the owners train you in the business and for how much?
5. Lease Arrangements and options (Get a copy of the lease.)
6. Title to Fixtures and Documentation of same; warranties
7. Insurance Policies; cost of needed insurance. Trends in insurance costs over the past ten years.
8. Outstanding litigation. Anticipated claims.
9. Vendor Information; Discounts available for you as well?
10. Employee Information; competition for qualified employees high in this area? Pay comparisons with competitors.
11. Noncompete Agreements? Confidentiality Agreements with employees already existing?
12. Relationship with neighbors? Any complaints from neighbors concerning the business (noise of customers, cleanliness of premises, etc.)
13. Crime problems? Holdups occur at all? Dangerous premises?
14. Security contracts with alarm and/or guard companies? Cost and assignable?
15. Independent Contractor Information (any people working with them who are not employees - what is the arrangement and do they have written agreements. Are they really hidden employees and what withholding tax liability may occur?)
16. Zoning or Use Restriction information on location of office. Expansion possible or expensive? Contraction of space possible?
17. Key competitors in area; past competitors; future competitors? Why did the competitors fail, if they did?
18. Key personnel staying or leaving? Why leaving if they are leaving?
19. How accounting information is handled. (Get copy of past three years tax returns and financial statements.) Fringe benefits are often used in professional corporations so that the income on the tax returns may be misleading. Somehow, you need to determine what "fringes" were obtained and confirm the data.
20. Name of lawyer and CPA.
21. Workers Comp. Claims and problems.
22. Any outstanding insurance claims for or by the company?
23. Trends in Business and Practice and rationale for their leaving.
24. Changes in law or insurance known to Seller? Changes in the past five years?
25. Past litigation. Results of same.
26. Past owners; past employees. What happened to them? (Try to get contact information about past owners and call them to see why they sold.)
27. Licensing relationship; investigations. History of any past problems with licensing organization.
28. Building department relationship, if any; History of any past conflicts with any building department inspections as to location.
29. Fire marshal relationship. History of any past conflicts or failures to pass any such inspection. Records of fire extinguisher inspection and passing.
30. Union issues, if any
31. Problems with insurance payment of bills (Medicare, etc.?)
32. Parking issues? Storage issues? Hazardous waste disposal?
33. Vandalism or crime in neighborhood? Police reports?
34. Changes in neighborhood?
35. Zoning changes? Construction issues? Road changes?
36. Neighboring business relationships? Complaints?
37. Any local government issues at all in last three years? Neighborhood issues or citizen groups opposed to location?
38. Complaints with EEOC or any other agencies?
39. Any tax audits in last five years? Get proof all taxes paid, from income tax to sales tax to withholding tax.
40. Any branch offices closed or opened and history of same?
41. Any change in local customer base (e.g. factory closed, mall closed, etc.). Any walk-on business? Referral sources of business altering? How and why?
42. Any employee leave and start own business near by, etc?
43. Any government business? Percentage? How handled?
44. Advertising? Where, when, how? Special deals offered to get business? Describe. Will they help in introducing you to the customer base? How and at what cost? Name as referral and how handled?
45. Past offers received? Pending? Status and what happened to them?
46. Web sites? E mail?
47. Trade names; trade marks; logos?
48. Intellectual property protection? Copyrights? Logos? Signage cost? Depreciation on same?

ECONOMICS YOU MUST KNOW AND INQUIRE INTO:

1. Validity of books; CPA sign off. Will they warrant level of business in the future?
2. Gross and Net analysis; Expense analysis.
3. Payroll analysis.
4. Three years tax returns; five years better
5. Write offs and discounts: how handled in the books?
6. Sales tax and excise tax returns if appropriate.
7. Trends of sales; trends of net. Trends of expenses.
8. Vendor history of payment (timely?) (Get a credit report on them.)
9. Fringes, both on the books and off
10. Depreciation schedule and value of fixtures.
11. What stays with landlord, what is removable (fixed?)
12. What training suggested by Sellers?
13. What personal guarantees have been given to what Vendors?
14. Proof of payment of taxes of all kinds for business.
15. Name of CPA and bookkeeper for business. Payroll service?
16. How do they estimate or determine billing for a procedure or project? Will they train? Software owned by them or licensed?
17. Depreciation schedule in past;

OTHER COMMENTS and QUESTIONS:

Quite often the buyer intends to radically alter the nature of the business and figures that all they care about are the hard assets (fixtures, signage, etc.) and do not need to know about past history. DO NOT MAKE THAT MISTAKE. Most of the issues that confronted the old business will still apply to your new business and they made their decisions on what business to do (and not do) predicated on the very information you should be deriving from your investigation.

It is a good idea to check out our article on Business Plans for the type of analysis that you should probably undertake. If you do your job of careful planning and investigation now, you may not find yourself in the position of the Sellers in a year or two - trying to get out of a business that is not successful by selling it!

And do not let your skill at your profession blind you to the fact that the skills of business bear little relationship to the skills of a doctor, lawyer, dentist or engineer. You have two separate skill sets to develop and if you do not, no matter good you are at your profession, you may fail.

Put simply, if you want to own a business, understand that it is a challenge different than the one facing you when you decided to master a profession and dedicate the time and energy needed to become a businessperson - or continue working for someone else who is already versed in business.