When buying an existing business it is vital that all aspects of the business are examined in detail. This due diligence is typically completed once an agreement in principle has been reached between the buyer and the seller, yet before a binding contract has been signed. This is typically outlined as part of a letter of intent between the buyer and the seller, or their agents. This step is typically done in concert with your lawyer and your accountant.
Properly completing due diligence allows you as the buyer to assess the asking price and review the overall details of the business. It also allows for a more accurate risk assessment prior to purchase as it gives you as the potential buyer access to the businesses confidential information such as their detailed financials and business processes.
Due diligence also gives you the opportunity to ask any questions you may have about the business and if negotiated may allow you to interview existing staff so you can gain insight from them.
Fulsome due diligence can mean the difference between buying a profitable business you can grow and taking on something that will lose money.
Common Due Diligence Items
To conduct due diligence you'll need to carefully review:
- Current and historical (last 3 to 5 years) financial information including income statements, cash flows, balance sheets, tax returns, profit & loss, etc.
- Records of accounts receivable and payable.
- Utility, lease, and other reoccurring accounts.
- Bank loans, lines or letters of credit, leases, and any other liabilities.
- The seller's statements about the business (reasons for selling, the business's reputation, state of the business overall, potential for growth, competition, etc.)
- Minutes of directors' meetings and management meetings
- Details about existing employees, suppliers, and any other pertinent information that may impact a new owner.
- Details about any short or long-term contracts/agreements that would transfer to a new owner.
- Details about plant, equipment, and all other assets including the current state of operation, repairs needed, and whether they are fully depreciated and in need of replacement.
- Intellectual property assets of the business (trademarks, patents, etc.)
- Existing credit situation for the business.
- Overly focused on closing the sale quickly.
- Involved in active legal proceedings.
- Lack of disclosure of important information (financial statements, reasons for selling, state of the business, current reputation).
- Unwilling to agree to in-depth due diligence or insist on a short due diligence period (standard is at least 30 days).
- Refuse to introduce you to suppliers, landlords, employees, or other key individuals.
- Have a questionable credit record and history.
- The business has a poor reputation with customers, staff, and/or suppliers.