Mastering Due Diligence When Buying a Business
Buying a business is a significant decision, one that requires meticulous planning and due diligence. But what does due diligence entail in the context of buying a business? In essence, it’s about leaving no stone unturned, ensuring you know everything there is to know about the business you’re about to invest in1.
What is Due Diligence?
Due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer to establish its assets and liabilities and evaluate its commercial potential. It involves the examination of financial records, business operations, legal issues, and more.
Why is Due Diligence Important?
Executing thorough due diligence when buying a business can save you from significant financial and legal pitfalls down the line. It helps you verify the information presented by the seller, uncover potential risks, and make an informed decision about the purchase.
Due Diligence Checklist
A. Organizational Structure and Good Standing
Start by assessing the company’s organizational structure. Review the company’s Articles of Incorporation, Bylaws, minute book, and organizational chart. Additionally, verify the company’s good standing with the Secretary of State in the state where the company is incorporated1.
B. Financial Information
Review audited financial statements, recent unaudited statements, and any available analyst reports. Examine the company’s inventory, accounts receivable, and accounts payable. This will give you a clear picture of the company’s financial health1.
C. Physical Assets
Take stock of the company’s physical assets such as equipment and real estate. This includes reviewing leases and purchases of major capital equipment over the last three years1.
D. Intellectual Property
Assess the company’s intellectual property assets. This includes patents, trademarks, copyrights, and trade secrets. Also, look for any claims or threatened claims against the company regarding intellectual property1.
E. Employees and Employee Benefits
Examine the company’s employment contracts, personnel handbook, and employee benefits. You should also review the resumés of key employees1.
More Areas to Explore
The due diligence process doesn’t stop there. Depending on the nature of the business, you may need to investigate further areas such as licenses and permits, environmental issues, tax records, material contracts, product or service lines, customer information, litigation history, insurance coverage, and professional relationships.
Conducting due diligence when buying a business is a task that demands time, expertise, and a keen eye for detail. It is, however, a crucial step in the business buying process. Armed with the knowledge gathered through diligent research, you can negotiate better terms, make informed decisions, and ultimately, secure a better deal.
If you’re considering buying a business, the team at T&H Consult is here to help. With our comprehensive Case Assessment service, we assist clients in navigating the complexities of business purchases, ensuring you have all the information you need to make an informed decision. We also offer specialized Due Diligence Services to provide further support in your business acquisition journey.