You should have a good understanding of the following items prior to acquiring the business.
Hidden Benefits/Salary:
It is very common for smaller businesses to offer hidden (under the table) incentives to key or special employees. Hidden benefits can take the form of a company credit card for personal gas, a vehicle, cell phone, paying for an employee’s spouse to go to conventions, and under the table cash payments in addition to the declared salary are some of the more common that I have found. As these hidden benefits are not declared and hence not taxed they are in fact, illegal. This can make them very difficult to uncover when performing your due diligence on the business in question.
Also, the seller will be somewhat reluctant to disclose exactly what he is doing, as you could use the knowledge as leverage in negotiations or even worse if the sale is not consummated and you are looking for some revenge you could report him to the appropriate authorities. Although my general guideline in obtaining information from the seller is to obtain everything in writing, in this one area I would suggest that a candid, private conversation with the seller take place at which time you specifically ask him if there are any employee “benefits” that may not be documented. If there is a Business Broker or intermediary involved in the transaction it is best that they are not present at this meeting.
You may believe that hidden benefits would only appear in relatively small businesses, but you might be surprised to learn that hidden benefits are just as prevalent in large corporations as they are in small businesses for key employees.
Employee Contracts:
It is important for you to determine if any of the key employees are currently under some sort of employment contract. If so, you must review the contracts and understand all of the terms and conditions, as well as the date that they are to be reviewed or renegotiated. Check the contracts to see if they contain non-compete clauses and ensure that they do not become void on any change to the ownership of the business.
Salaries & Wages:
Review the current salaries and hourly rates of employees. Determine if they are in line with local industry standards. This can be accomplished in numerous ways. Most State departments of labor or commerce will maintain statistical wage information for different labor categories. Another method is to check the classified ads in the local newspaper or contact an employment agency in the area where the business is located. You can also go to the large on-line employment web sites such as monster.com and search their listings. It should be noted that one of the most popular ways that a seller can utilize to inflate the company’s profits is to hold off on raises. The resultant being as soon as you buy the company you find that in order to be competitive within the labor market you have to immediately come up with 20% raises for all of the staff.
Benefits:
Are the benefits that are currently offered such as vacation days, sick, pregnancy and bereavement leave in-line with local industry standards? You can use the same methods as I described under the heading of “Salaries & Wages” to try and determine if the business you are looking to acquire is in fact in-line with local industry standards. If you are forced to change the benefit structure when you acquire the business it can have a major impact on your cash flow and hence your profitability.
Insurance:
If the company currently provides health care coverage, check on the renewal date of that insurance. Contact the insurer and try to determine what the estimated premium increases may be for the next renewal period. If the business you are considering acquiring provides any additional insurance such as life, disability, dental and vision you should investigate potential premium increases in those areas as well. Does the company pay a portion of the health care, if so does it pay the same percentage for all employees or is there a graduated scale?
Do not instantly assume that you can reduce the health care coverage or the employer portion as soon as you acquire the business in order to increase profits without having a negative affect on the productivity of your employees. I have seen many instances where employees are paid below market rates but remain with their current employer strictly because of the health care benefits provided. I have also seen employees leave their current company to take a position with a lower pay rate just because their new employer has superior health care benefits.