Rule #1 when buying a business: You better do your homework. "It's nothing like buying a house," says Patrick Seitz, certified business intermediary and Chattanooga member of the Sunbelt business brokerage network. "There's a lot more to it."

Buying or selling a business is a complex process requiring a great deal of commitment, money and due diligence. Because of that complexity and the diverse marketing, accounting and legal skills needed to execute a sale, the services of a mergers and acquisitions specialist or a business broker are often required.

The first priority of a broker or any owner looking to sell is to evaluate the company's financial and operational data. "We put everything on paper and see what's good and where our warts are, so to speak, and then present it in the best light to the market," Seitz says.

One of the most common warts is a poor financial statement. Too often, owners attempting to conceal profits end up feeling the sting of that undervaluation when they move to sell. To ensure they get full value for their companies in the event of a sale, Seitz coaches his clients to improve their margins, decrease expenses and "report everything straight up."

While a profitable business may not demonstrate all of its potential on a murky financial statement, an unprofitable business is easy to spot and will be a difficult, though not impossible, sale. But just because a company is turning a profit does not mean it's in great financial shape. For example, if a company exhibits increasing revenue without a corresponding increase in profits, it could be an indication of eroding margins due to pricing pressures in the industry. To check for subtler, long-term trends, a thorough examination should take into account financials from at least the three prior fiscal years, says Stuart Campbell, a Nashville attorney with Stites & Harbison, who advises buyers and sellers on the legal aspects of negotiating a sale.

In taking the company to market, the intermediary function of a broker provides an important layer of confidentiality for the seller. Brokers market companies using generalities, such as "coffee shop, $300,000 annual revenue," and prospective buyers must typically jump through several hoops before learning any specifics of the businesses they court. That confidentiality is crucial for protecting sellers from the sort of panicked atmosphere that can wreak havoc among customers and employees and devalue the business right at the point of sale.

A business broker can also be of use to the buyer. According to Seitz, seven out of ten buyers he works with end up purchasing a different company than the one they initially enquire about. Most buyers don't know exactly what kind of company they want to buy but rather are looking for an opportunity that fits their lifestyle and financial ability. A broker can assess those wants and needs and match an individual with the right business.

Perhaps most importantly, a broker can help a buyer pay for it all, as well. Many potential buyers are offput by the prospect of an astronomical down payment, but brokers are familiar with a wide array of financing options and know how to attract a lender who will bankroll the venture with a manageable payment plan.

Larger scale transactions are even more involved and are typically handled by investment bankers, who specialize in mergers and acquisitions, rather than business brokers. Many of the same rules of due diligence hold true, however, says Jeffrey Nahley, investment banking chief for Nashville-based Avondale Partners. "Our due diligence is embedded within the homework that we do when we've been hired to market the company," Nahley says. A company seeking to sell engages a representative like Avondale, which then conducts an intensive review of the company's management, operations, financial documents, history, opportunities for growth, and outstanding contracts in order to determine the company's value. That information is then compiled into a book that is stored in either a physical or electronic data room where it can be accessed by the seller as well as the buyer, who will be conducting a due diligence investigation of his or her own.

For first-time business purchasers, it's equally important to examine one's motives for ownership as it is the health of the business in question. Buying out a competitor to grow an existing business is one thing, but an individual buying a first business as a career change or an investment needs to understand all of the rigors and headaches that are sure to follow. A business requires constant attention to remain profitable, and ownership isn't for everyone. "If you've got a million bucks cash, you don't really have to buy a business," Seitz says. "But if you have maybe fifty or a hundred thousand dollars and are sick of what you're doing, then maybe you need to look at doing something on your own. But it will take a serious leap of faith for you to write that check."