Monday Jan 17, 2022

How important is due diligence when buying a business?

Performing due diligence before closing on a business purchase is actually the most important step in purchasing a business. Unfortunately, it’s also a step that many small business buyers randomly approach, or leave altogether. Due diligence generally occurs immediately after the buyer and seller reach a formal agreement on the sale of the business, depending on the results of the due diligence review.

These are the things to include in you due diligence when buying a business:

1.) Accounting. Small businesses are notorious for keeping poor accounting records, so it is virtually mandatory for you (or preferably a professional accountant) to review the company’s accounting records for accuracy and discover any problems.

2.) Site inspection. Although you have obviously visited the site of the business you are purchasing, now is the time to take a closer look at the physical aspects of the business. You should take a close look at the equipment to make sure it is in good shape and capable of performing the tasks you are planning. You should study the building to make sure there will be no surprise repairs for which you will be responsible after taking possession. And, most importantly, you need to determine the general condition of the workplace. Much can be determined by the way the company has operated in the past: is it well organized, free of litter and a good working environment? Don’t skimp on this part of your due diligence.

3.) Employees. If the company has employees, you will likely want to retain most of the employees who come with the company to maintain continuity. This can sometimes be a problem, depending on what happened prior to your participation. You need to talk to some of the employees and make sure there isn’t an employee riot under the surface waiting for it to break out.

4.) Customers. You need to interview a few key customers to make sure there are no customer relationship issues waiting for you when you take over. A problem in this area can indicate significant internal problems with the company, so don’t skip this step.

5.) Sellers. The same goes for the company’s suppliers. You should contact some of the major vendors to make sure there are no open issues and the vendors will be happy to continue doing business with you.

6.) Government. You need to make sure that the business has all the necessary licenses and permits to operate. You should be aware of the “exemption” conditions that will change when a new owner takes over. In drastic situations, you may not even be able to operate the business where you are now, due to a code change or other government action that requires the business to be vested. A new owner generally breaks the vested rights consideration.

The goal of due diligence is to find out if there is something in the business operation that can cause not go ahead shopping … as well as to highlight areas that you will likely need to address shortly after taking over.

Don’t skip, or slip, the due diligence process … it could come back to haunt you.

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