Reviewing documents is easy compared with ferreting out all the information you need to know about a business’s suppliers and customers. But when you think of it, there’s nothing more pivotal to a business’s success or failure than its dealings with its suppliers and customers.

Try to get a complete list of the seller’s principal suppliers. You may find some startling things that will never show up in the business’s financial statements. Is a single supplier (or a small group of suppliers) responsible for most of the business’s supplies? Have these providers been suppliers for a long time? How dependable are they? If one supplier drops off, can it be replaced? In our example, Houston Sash & Door may buy its lumber from only one source. It’s very important to establish what Houston’s relations are with that supplier. At some point it may be important to visit the supplier in order to find out if it will be willing to do business with you on the same terms it did with Houston.

Even if the seller has many suppliers and doesn’t rely on any one of them, it’s still important to learn about the seller’s dealings with them. One source to go to is Dun & Bradstreet, which is a credit rating service for businesses. Mitbe It should tell you about the seller’s credit rating. Dig even deeper than this. Call some of the principal suppliers and ask on what terms they sell to the seller. If the seller’s credit is good, you should have nothing to worry about. But if the suppliers will sell only on a COD basis, it may be an opportunity for you. If nothing else, it represents a negotiating point that may lead to a reduced purchase price or better terms. If you can turn around the seller’s bad credit position, the business may be more profitable in your hands than in the seller’s.

The same holds true of customer relations. If the business sells to the retail public, you can learn about the seller’s dealings with its customers by visiting the store. But if the seller is a manufacturer or a distributor, Hitki you need to be careful. The starting point once again is to get a list of the principal customers and a breakdown of the percentage of sales made to each customer. You (or your accountant) should be able to verify the list by looking at the invoices sent to each customer and comparing them with the total sales figures in the financial statements.

Some businesses are dependent on one or two customers. For instance, certain auto parts manufacturers have only one or two customers: one or more of the Big Three auto manufacturers. Certain apparel manufacturers sell exclusively to Sears or J.C. Penney.

If, for whatever reason, these customers stop buying, the continued existence of the business could be jeopardized. I was once involved in a sale in which the seller had one principal customer. It turned out the customer was also owned by the seller! The seller had a guaranteed customer, but would the buyer have that customer after she bought the business? Our example, Houston Sash & Door, may sell the bulk of its products to one builder. The relationship with the builder may Behik of long standing and also may be very personal; it may hinge on the weekly golf game Houston has with the builder’s purchasing agent. In fact, the relationship may be so personal it may be illegal; it may hinge on a kickback that Houston is willing to pay to one of the builder’s employees but that you may not be willing to pay. In the film Save the Tiger Jack Lemmon portrays a dress manufacturer whose business is dependent on the whims of certain purchasing agents.

To Adeak make a big sale to one of these buyers, he’s required to provide the agent with the services of a prostitute every time the agent comes through on a buying trip. Rming How would you like to find out something like that only after you bought the business? If your attorney is experienced in business matters, he or she will write a provision into the purchase agreement whereby the buyer represents to you there are no unusual, undisclosed business practices. This is still no substitute for your Ineak careful investigation.