Buying An Existing Business Part VII of IX

Due Diligence


The phrase is composed of two words. “due” which the dictionary defines as “proper or adequate” and diligence, which is defined as “degree of care or caution expected of a person. Especially as a party to an agreement.”

The due diligence phase is the time when you will have access to the company’s books and records.

Once a price and terms are agreed upon by the buyer and seller due diligence should be performed. At this point the buyer should give the seller a down payment, and the seller should remove the business from the market during this critical period.

This critical investigation period can last up to four weeks for most small businesses. Keep in mind, however, the time period is negotiable.

A proper due diligence period goes beyond the financials. At a minimum you should also investigate the assets, the customers, the suppliers, the employees, the competition, the market, the industry, the sales strategy, marketing possibilities, contracts, legal issues, and so on. When you have finished your due diligence you should feel comfortable that you and the business are a match, and if something needs fixing you can fix it at a reasonable cost.

Now is the time you should get your accountant to help you identify risk areas. I’ve been in negotiations with business sellers for many years and have been forced to "walk" on several transactions because I found out the numbers were not real. I often had to be very creative during the due diligence process to find the real profit or loss of the business.

Take your time and analyze whatever documents are made available. Below is a small sample of a few items to look for:

Organizational Documents
Financial Statements
Tax Returns
Canceled Checks
Employment Contracts
All Outstanding Litigation If Any
All Contracts And Outstanding Orders
Computer Systems, Software And Other Technology
Issues Regarding Environmental Problems
Payroll Records
Staff Files And The Staff Manual
Copies Of Pension And Profit-Sharing Plans
Union Contracts, If Relevant
Contracts And Leases

Having completed your research and confirmed that the information provided to you is true and correct, you have one of two choices. You can accept the seller's offer and move on or you can rewrite your offer.

DISCLAIMER: The purpose of the information contained within this Blog is to provide general guidelines for various subjects of interest. Your use of this information is at your own risk. Each user of this Blog should consult a qualified professional who understands the user's particular factual situation before making decisions, and PRO-BIZ marketing, LLC makes no express or implied representations or warranties. PRO-BIZ marketing, LLC does not guarantee the completeness, accuracy or timeliness of this information.

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