Houston has been expanding and shows no signs of stopping.

It tops the country in small business optimism, and is ranked number 8 in the nation for small company growth.

This confidence in revenue, employment, and company expansion is a result of economic diversification and a healthy business environment.

The massive consumerism, increasing business opportunities, and diversified cultures attract businesses to get the maximum benefit out of it. This is one of the big reasons why Houston made it into the ten metro areas where the startups have the highest foundations (it’s also considered the Startup Capital of Texas!). Moreover, in the year 2020, a difficult year for business, Houston still attracted almost $743 million in venture capital funding. 

If you are considering buying a business in Houston, below are some tips to consider. However, it is also important to mention that these are NOT absolute tips while buying a Houston business. You may need additional checks, and we always recommend speaking with a CPA familiar with the Houston market and your industry, as well as an attorney before making any final decisions.

Here are tips for buying a business in Houston:

Know Your Goals for the Business

Are you looking to purchase a company that you will own, operate, and actively work your day-to-day in? Will this be your sole focus?

Or, are you looking to add another company for your roster, with a role more removed from the day-to-day operations?

Additionally, is your long-term goal to sell the company for a profit, or is it to pass down to a trusted friend or family member, or even grow to the point you can close shop and retire.

Understanding your goals for this business will help you identify companies available for sale that will be a good fit for you.

Research and Prepare

You will gain both immediate and long-term benefits from researching not just the business, but competitors and the market. You’ll not only be more prepared to bargain, but you’ll also present yourself as a more desirable buyer.

Once you’ve identified a viable business, inquire the reasons for the seller’s withdrawal from the company. Your next steps will be considerably different depending on the sellers motivation, and your plans for the company.

Some of the important questions you may consider asking:

• Why is this business for sale?
• If you want to grow the business, ask yourself how you can add further value to the business.
• Does the business model fit with the demographics of Houston?
• What is the tax status and entity structure of the company?
• What are the future prospects of the company?

The financial evaluation is another key aspect of your investigation, so you must do it. You can study the seller’s company with the aid of an accountant, who can assess important financial figures including sales, profitability, debt, expenses, and cash flow.

A CPA who understands how financial statements work and what should and should not be included can also highlight any potential irregularities and red flags, and work with you to build projections, budgets, and forecasts. More on that now.

Examine the Business’s Financials

Make sure to examine the company’s financial records from the previous few years, identifying trends and gathering questions and items to clarify, paying particular attention to:

• Cash flow statements
• Balance sheets
• Sales records and accounts receivable
• Tax returns
• Accounts payable
• Advertising costs
• Debt disclosures

Once you have all the financial data, you may consider the following check to make sure that everything is in place:

• Do NOT accept the sellers’ financial statements directly; instead, confirm that the tax returns and financial statements have been audited by a certified public accountant.
• Analyze the business’s income stream using the financial statements.
• The company you buy may NOT be profitable just yet (especially if it is a new company), but there should be a clear path to profitability.
• Know whether the company’s debts and liabilities are part of the deal, and be cautious when accepting them.
• Make sure you are able to understand insurance and licensing documents

Buying a business is always a risk. Both parties (sellers and buyers) try to get the maximum benefit out of it, much like buying a house. Just like you’ll need a realtor to buy a house, you will need an accountant you can trust, and ideally who will continue working you once the deal has closed. You’ll want to look for business valuation services as a service or business advisory when you are shopping for a CPA.

Here’s a closer look at some of that process.

Have a CPA Complete a Business Valuation

The process of estimating a company’s present value while considering all of its facets involves doing a business valuation. A review of a company’s management, financial structure, the potential for future earnings, or the market worth of its assets may be included in a business valuation.

Depending on the CPA conducting the evaluation, the company, and the industry, many tools may be employed for appraisal.

Examining financial records, discounting cash flow models, and similar company comparisons are common methods for business valuation.

In addition, valuation is crucial for tax reporting. The Internal Revenue Service (IRS) mandates that a company’s fair market value be used to determine its valuation. This differs for public and private companies, however.

Depending on valuation, certain tax-related activities, such as the sale, purchase, or donation of stock in a firm, will be taxed.

Below are a few brief explanation of ways businesses are valued:

These are NOT the only business appraisal methods available, and for smaller private companies the process is often more tailored to the unique circumstances of the business. Replacement value, asset-based valuation, and breakup value, and many more approaches are further techniques. If you’re looking for something more simple, and expert can help you identify what is impactful in your decision to buy.

Hire a Team of Professionals

Use qualified experts to assist with the purchasing. It is advisable to incorporate them at the beginning of the process rather than when a problem already exists. A business attorney and a certified public accountant (CPA) should be on your team, and an expert should be looking at all legal and financial documents to ensure accuracy.

The financial success of a firm is among the most crucial factors to take into account before purchasing it. However, other seemingly small factors can have a big impact. An example we see often is that poor bookkeeping practices affect a lot of small firms, with incorrect IRS reporting, missing out on deductions, or delayed payroll. All of these lead to inaccurate ledger reports and a lack of strategy for taxes and profit. This is why when we do evaluations, the books are something we look at in detail. We also examine revenue streams in detail, and can get a sense of how the business is operating, identify potential revenue streams, and project the business’s future earnings.

Analyze the Tax Profile of the Business

A tax profile is a great way to analyze the past financial record of the company.

Your accountant will ask the following questions while doing the tax analysis of the company.

• Houston tax credits the business claimed over the years.
• Does the business comply with the IRS rules and Houston taxes?
• What is their entity structure and is that lowering or increasing their tax burden?
• What deductions or credits has the business taken advantage of and what are they missing?
• Are employees and independent contractors classified correctly?
• Are the current tax year’s payments and reporting up to date?

There may be additional questions depending on the specifics of the business. Once you have all the data, your accountant will make an accurate calculation of the company’s financials and its possible future prospects. 

Understanding that Business Acquisition is a Unique Experience

While there are general methods that will be followed during an acquisition, it’s critical to remember that each acquisition is unique and that depending on your circumstances as the buyer (i.e. is this your first company you’re acquiring or your fifth?) and the company, the terms and needs of the deal will be different. 

Understanding your goals and hiring the right people to assist you in the process will ensure everything is above board and you are as prepared as possible for the transision.