Carry out Due Diligence - no exceptions

What is Due Diligence?
After the buyer of a business you will given a specified period of time to carry out a due diligence investigation of the business. Due diligence simply means checking out the business fully.

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 generally will bend over backwards 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 because they may pick up things you could miss.

A lot of the information you will require will be in the form of written documentation, so make sure you see copies of all relevant papers, such as leases, contracts, finance agreements, stock sheets, invoices, reports and all the financial records and statements.

You should ask for the management reports that the business should have completed periodically and make sure you see the debtors list (people owing you money), staff records, payroll, customer details, marketing brochures, stock records, list of all assets, sales reports, etc.

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

Is Due Diligence Really Necessary?
Due diligence is absolutely essential. 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 so that you can arrive at a decision to complete the purchase.

If a business owner is evasive or uncooperative then this can 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 any further and it would be advisable to move on and buy another business.

What Areas are Involved in Due Diligence?
Due diligence will involve a comprehensive look into almost every area of the business.

Some of the things that need to be looked include:

  • Financials in detail.
  • Sales and marketing.
  • Conducting a full review of the operation of the business.
  • Checking over all the systems and methods that are 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 the 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.