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© Copyright 2002-2003. All rights reserved.
Page 8
How To Investigate Any Business Opportunity
2. Identify the reason for indebtedness.
3. Determine terms and payment schedule.
4. Will the acquisition accelerate the note or mortgage or is there a prepayment penalty?
5. Determine if there are any balloon payments to be made and the amounts and dates due.
6. Are the notes or mortgages assumable?
Income Statement
The potential earning power of the business should be analyzed by reviewing profit and loss statements
for the past 3 to 5 years. The business's earning power is a function of more than bottom line profits or
losses. The owner's salary and fringe benefits, non-cash expenses, and nonrecurring expenses should
also be calculated.
Financial Ratios
While analyzing the balance sheet and the income statement, sales and operating ratios should be cal-
culated in order to point out areas requiring further study. Key ratios are the current ratio, quick ratio, ac-
counts receivable turnover, inventory turnover and sales/accounts receivable. The significance of these
ratios, the methods for calculating them, and industry averages are available through Dun & Bradstreet
and Robert Morris Associates. Look for trends in the ratios over the past 3 to 5 years.
Leases
1. What is the remaining term of the lease?
2. Are there any option periods, and if so, is the option exercised only by the choice of the tenant?
3. Is there a percent of sales clause?
4. What additional fees (such as a common area maintenance or merchants association dues) are paid
over and above the base rent?
5. Is the tenant or landlord responsible for maintaining the roof and the heating and air conditioning sys-
tem?
6. Is there a periodic rent increase called for to adjust the rent for changes in the consumer price index
or for an increase in real estate tax assessments?
7. Is there a demolition clause?
8. Under what terms and conditions will the landlord permit an assumption or extension of the existing
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