Due Diligence When Purchasing  A Business

The moment you become interested in purchasing a business, you need to become engaged in practicing due diligence. While many prospective business owners view the practice of due diligence as only conducting a financial review of an existing business that has caught their interest, true due diligence encompasses a much broader spectrum than mere financial considerations.

In its entirely, practicing due diligence means that you will need request copies of all documentation relating to the business in question. This means that you will need to review copies of all contracts and loan agreements as well as leases, inventory records, management reports, sales and facility maintenance records, reports for both accounts receivable and payable, payroll and benefits records, marketing materials, customer records and any records regarding business assets.

You should also take the time to learn about any litigation the business has experienced in the past or may be experiencing at the current time. The same is true regarding any tax audits or insurance disputes.

Additionally, just as due diligence requires that you spend some time thoroughly investigating the financials of the company you are considering for purchase; it’s also an excellent idea to make sure that you investigate facilities. You might even find that it’s wise to retain the services of an experienced inspector in order to determine whether there may be problems in the facility that could create issues later on.

Finally, you should also ensure that you exercise due diligence in uncovering any matters related to marketing and the overall industry of the business you are considering. This type of investigation will include reviewing the size of the market as well as current competition. You also need to spend some time reviewing the primary vendors and supplies in an effort to understand how these factors impact the dynamics of the business.

By taking the time to do your homework, and practice due diligence, you can better protect your future financial investment and make sure that you purchase a successful business instead of acquiring a profit draining lemon.

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Filed under: Articles • Buying A Business • Self Employment

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