Due Diligence - Is It Critical?

"Due Diligence will involve a comprehensive look into almost every area of the business."

Yes, a thousand times yes. It’s not an option. Due diligence is absolutely essential before buying a business - or anything else for that matter. You must carry out due diligence - no ifs, no buts, no maybes - no exceptions.

No one should look at buying a business or signing any type of agreement to purchase something until full due diligence has been completed. If the seller of the business is serious about selling then he or she will take the time to make sure that the due diligence is carried out efficiently and that all assistance is given to you as the potential buying party to arrive at a favourable decision to complete the purchase.

If a business owner is evasive or uncooperative then this may point to the possibility that they have something to hide. In any event, if they are not cooperative there is no sense in continuing the due diligence process any further. It would be advisable to move on and buy another business.

Remember.....If you learn nothing else learn this - carry out due diligence.

Only someone with "half a brain" would buy a business without carrying out a full investigation into what is being purchased. Get professional help if you need to, but do it.

Thousands of people have lost everything including their business, their home, their savings, their assets and sometimes their marriage because the business they bought was not what it was made out to be. If necessary treat every seller with suspicion and every business as a potential "scam" until you have satisfied yourself as to the profitability and value of the company or operation on offer.

Due diligence simply means checking out the business fully.

Due Diligence is usually carried out by you as the buyer. It is normally done in conjunction with your accountant and other business advisers. You may need their help to assess some of the technical areas or financial areas such as the accounting and financial records.

The amount of due diligence that you carry out will depend on the size of the business and on what exactly will be required. A lot of potential business deals will fall over at this time of due diligence because things will be revealed that the potential buyer will not be happy with.

After the buyer signs a letter of intent to buy the business and the seller accepts the letter, the buyer is given a specified period of time to carry out a due diligence investigation of the business.

As the buyer, you will be able to access all the financial records of the business, look at all the facilities, equipment, staff, stock, etc. If you show a serious interest in the business, you will find the owner will give you all the information you request. The owner will generally “bend over backward” to assist you and help you come to a decision to buy.

You cannot simply assume that the owner of the business will be totally honest with the information supplied to you. You need to investigate, confirm and leave nothing to chance. During the due diligence process, don't forget to make use of your professional advisers. They may pick up things you could miss.

Due diligence will involve a comprehensive look into almost every area of the business.

Some of the things that need to be looked at include:

  • Financials in detail.
  • Sales and marketing.
  • Conducting a full review of the operation of the business.
  • Checking over all the systems and methods used.
  • Looking at the hours of operation.
  • Analysing and assessing the quality of staff and their functions.
  • Seeing the methods used by the sales teams and assessing the quality of sales staff.
  • Looking at the process of production.
  • Reviewing the advertising and promotion and comparing results with the costs involved.
  • Checking over the wages records and looking at staff benefits.
  • Seeing how the telephone is answered and looking at the quality of the office staff.
  • Assessing the success of the sales strategies.
  • Checking the overall profitability of the business.

You will need to look at all existing contracts and agreements held by the business. These may be contracts to purchase products, or materials, or to supply goods and services to customers. Make sure these contracts can be transferred or assigned over to you with the business and that you are happy to accept the terms and conditions contained in those contracts.

You will probably need to ask the seller to introduce you to the suppliers and customers in due course. This should be made a term in the contract. You don’t want to find any surprises later on, so make sure that the seller is open with you as to the businesses’ relationship with customers and suppliers and check that there are no past problems such as legal arguments that could arise and cause you strife after you take over.

On all things legal, make sure your lawyer is involved. Pass all contracts and other documentation to your lawyer for a quick review.

You may need to bring in your accountant to do a full review of the financial statements that have been prepared over the last 3 years and to prepare an independent financial report on the state of the finances of the operation.

Play it safe because "it's better to be safe than sorry".

You owe it to your family if not to yourself to do this. If you are married, make the decision together with your spouse. Try not to bulldoze over the opinions of your husband/wife/partner. There is safety in listening to each others concerns. It’s best to buy only when you have a unanimous agreement. That way, if for some unexpected reason, things go wrong later on there would be minimal fallout because you both made the decision as a team. Then you can simply pick yourself up and go again until you succeed.

Be Thorough when carrying out due diligence. Make a full list of all the things you need to see and the people you need to talk to, so you will get a complete picture of the actual situation, rather than relying entirely on what the seller tells you. Don't forget to look at all the facilities and spend a bit of time looking around the business premises and asking questions of employees and managers who are in charge of various areas.

Never ever talk to employees without the seller's permission. They may not know that the business is for sale and the seller may wish to keep this information confidential to avoid confusion or problems– like staff jumping ship for instance.

Check the environment in the industry. Look at the size of the market. Investigate the principal suppliers and customers. Look at the competition and get an overall picture which should help you decide whether you want to be involved in that particular industry or not.

Unfortunately many business owners do make false representations. They supply incorrect statements on the state of their business. Many lie. It’s because of their desire to show the business in the best light and obtain the best price they can.

There is absolutely no excuse if you buy a business and then find it is a "lemon". You will only have yourself to blame if you do not carry out proper due diligence.

Like we said – it’s not an option.


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