Due diligence is at the heart of every business purchase.
If you fail to conduct adequate due diligence upfront there's a good chance it could come back to bite you later. Business brokers can help guide you through the diligence process, but ultimately it's you (the buyer's) responsibility to make sure there are no hidden surprises.
That could be a problem in more ways than one. Right out of the gate, you have to recognize that you're an entrepreneur–not a due diligence specialist. Although you may have a general sense about the kinds of things to look for, you're probably not equipped to singlehandedly organize a complete due diligence process.
When buying a business, you should create a due diligence checklist. Here are just some of the areas that your due diligence checklists should address.
- Financial statements. Due diligence typically begins with an inspection of financial records. A review of the last five years worth of audited financial statements is helpful, but also take a look at less obvious things like the general ledger and an up-to-date credit report.
- Assets. Asset appraisals are standard fare for due diligence. In addition to an inventory of assets, expand your search to include leases and UCC filings that could turn up liens on specific pieces of property or equipment.
- Legal status. Sellers should disclose any pending litigation or threats of pending litigation prior to sale. You'll want to work closely with your attorney to make sure you don't inherit any legal nightmares with the business, including unsatisfied judgments.
- Contracts. Once you own the business you may also own its contractual responsibilities. Request a statement that describes the nature and terms of current contracts. From large customer contracts to the contract for the office copier, you need to know which contracts have been written to survive a transfer of ownership.
- Employees. During due diligence, request a list of current employees that includes their positions, salaries, and years of service. You should also expect to be provided with the personnel handbook and information about all employee-related benefits.
- Other issues. There are a multitude of other issues that need to be included on a due diligence checklist including customer lists, environmental information, permits, licenses, marketing initiatives and more. Consult your broker and/or attorney to make sure you check list is complete.