If you are considering buying a business, this is quite possibly the biggest financial decision you will ever make; even more so than purchasing a home. After all, your business is your livelihood. If your business isn’t successful, it can have a devastating trickle-down effect. Prior to buying an existing business, you will want to evaluate
of your options and risks prior to making any binding decisions and/or signing on the dotted line.
That being said, nothing is more important than doing your due diligence. As defined, “due diligence,” in regard to buying a business is, “a comprehensive appraisal of a business, undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.” By taking the time and effort to do your homework, you can possibly save yourself some unnecessary, costly and nasty surprises.
Due diligence is by no means a “general” investigation. Due diligence requires an in depth, almost invasive (if you will) investigation prior to buying a business. Even if you think a seller is being completely forthcoming, you owe it to yourself to verify the information you have been given. Don’t be worried about offending anyone; again, this is your livelihood. It is imperative that you enter the “deal” with eyes wide open!
So, what does due diligence involve? Excellent question! Below are some tips that may be helpful when buying a business to make sure you know exactly what you are getting into.
- Examine ALL financial business/tax records (get your accountant involved);
- Examine the original business plan, articles of incorporation, by-laws, meeting minutes, and any other business filings;
- Consider marketing research and future expansion possibilities;
- Inspect any and all legal documents (past and present) relating to any legal actions;
- Before you invest your hard earned money, invest time at the business you are considering buying; talk to executives, managers and employees;
- Identify who is in charge and explore/evaluate their qualifications/credentials and history;
- Identify all employees and explore/evaluate their qualifications/credentials and history;
- Examine ALL customer and subcontractor related records;
- Inspect the present condition of the existing facilities, inventory, equipment, furniture, and fixtures;
- Inspect all documents regarding business agreements and liability, including past and present sales and purchase agreements as well as potential liens;
- Most importantly, take note of, even the slightest, discrepancy between what has been reported and what you have discovered.
There is no shame in asking (an abundance) of questions. If you ask questions and are met with resistance, or have an uneasy feeling, this (may) not be the deal for you. If it doesn’t feel right… it probably isn’t!
With the assistance of your attorney, the due diligence process should involve all concerned parties; meaning both buyers and sellers. As a buyer, if you are not completely satisfied with the information you have gathered… WALK AWAY!