Don't Be Fooled By A Business Seller's Claims, Due Diligence Is Critical

How Due Diligence is Done

Doing due diligence for a small business takes time to complete. This is so because the process involves going through the company’s financial records, cross-referencing and ensuring that everything is as stated.

However, as a business buyer, you should not conduct due diligence by yourself. You should hire professionals such as an accountant and lawyer with experience in the field. You should also be a part of the team by looking over the documents, but allow the experts to do their jobs before you make a purchase. Consider doing this because, as experts, they will find important information that you would’ve missed.

You should have a commitment with the seller in the form of a Purchase Agreement or Letter of Intent to start the due diligence process. 

The next step is to go through your findings with your team to ensure all critical parts are covered. Your teams will have a checklist of their own, but it doesn’t hurt to set up your own list.

A Checklist for Due Diligence

When you’re conducting due diligence, there are several aspects about the prospective company that you should take a look at. Below, you will find issues that you should be on the lookout for when conducting due diligence.

•        Financial Due Diligence

Financial due diligence, also known as due diligence for accounting places the focus on the economic portion of the prospective business. The emphasis is placed on assets, accounts, liabilities, tax, historical trends, amongst other things.

You should look at the business’ past financial data such as balance sheet, income statements and cash flow statements. You should also pay close attention to the accounts receivables, gross profit, rate of return on the products offered and get an understanding of the company’s inventory history.

•        Legal Aspects of Due Diligence

Legal due diligence shows the legal aspects of a business, such as legal contracts and any other document that can have hidden risks for a lawsuit. Some contracts that you should pay close attention to are leases, distribution and purchase agreements, business sales contracts, articles of incorporation, business registration, copyrights, trademarks and employee’s agreements.

•        Due Diligence for Operations

Operational due diligence comes in when you want to do a full investigation of the business to actually see how it operates. Some operations include the business market, the model and its competitors.

You should be able to identify the customer patterns, learn how marketing for the business is done, run a market analysis, get feedback from people, do research to find trends in the market and study the competitors.

Repercussions of not Conducting Due Diligence

You may end up making a mistake with purchasing a business without doing your due diligence. The business owner may try to fudge the numbers to try to get you to buy. If you don’t do your due diligence, you may end up buying a business that isn’t in good financial standings.

Purchasing a terrible business will cost you money because that business or product may cause you to spend a lot of money to overhaul it. You may also inherit bad debts and lawsuits.

Conclusion



Due diligence is important when you plan on purchasing a business or product. It can keep you from spending your money on something that will eventually leave you at a loss.