How To Conduct Due Diligence When Buying A Business

As an investor looking to purchase a business, one thing remains constant the need to invest money in the right kind of businesses. To this end, for investors, prospective businesses should have a good standing. This is where due diligence comes in.

Due diligence is the process whereby a prospective owner conducts a thorough examination of the established business that he or she wants to buy. Ideally, due diligence is conducted right after the business owner and the prospective buyer have agreed to a deal in principle but before a binding contract has been signed. The premise behind undertaking due diligence is to negate the chances of unpleasant surprises occurring after buying a business on the Gold Coast. Additionally, it enables prospective business owners to attain an intricate understanding of the business, especially with regards to the value of the business.

buy a businessHerein are the various factors that you should be covered in every due diligence undertaking; consider it as a due diligence checklist if you will. You need to seek the following:

#1. Financial Information. Typically, the main reasons anyone would want to purchase an existing business is to grow the business and thereafter generate profits from it. In this regard, it is important to ensure that the business has a good financial standing. To this end, you should seek the following financial information:

– The business’ credit report,
– The past three years audited financial reports,
– Analyst report,
– A schedule of inventory, accounts receivable, and accounts payable,
– The company’s projections and strategic plans and any other important financial information.

Related to financial information, prospective business owners should seek any relevant tax information including federal, state, and local tax returns, sale tax returns, and employment tax return among others.

#2. Employee And Employee Benefits Information. Any business operating must have employees. As such, you need to seek information about the status of the employees, including a list of all employees and the remunerations for the past two to three years, the legal documents pertaining to the employee contracts, employee health insurance and welfare coverage and any other relevant information.

#3. Legal Standing Information. Since most businesses operate as legal entities, it is important to seek any information pertaining legal matters of the business. In this regard, you need information on any material contract that the business has, any ongoing litigation, the insurance coverage of the company, the company’s licenses and permits, and much more.

#4. Business Organization Information. This information may be covered under the legal standing evaluation. However, you need to find out everything about the company’s organization and standing, with a particular interest in the company’s By-Laws, Article of incorporation, shareholder numbers and amount of shares held by each shareholder.

#5. Physical Assets And Real Estate. You should also seek information on the assets that the company has in terms of physical assets as well as real estate assets. This is particularly important in evaluating the true value of the company.

#6. Environmental Issues. Although this information may be covered under the legal standing, it is important, nonetheless, to ensure that you have an intricate understanding of any environmental issues pertaining to the company that business may have.

However, while performing due diligence, you should always seek the services of your lawyer, accountant, and business banker as they are the more experienced that you are in handling issues of business purchases. However, if you opt to conduct due diligence on your own, be cognizant of the tale tell signs of a bad business.

They include a seller unwilling to disclose all the requisite information (financial statements, reasons for selling the business etc.), businesses involved in any legal proceeding, businesses with questionable credit history, and much more. Regardless of you choose to go about it, just make sure that you conduct thorough due diligence.