If you are looking to buy a business, it is important to know what you are getting yourself into. It is essential to do your homework. Without proper research, you could miss an important red flag that could cause your newly acquired business to struggle or even fail. No one wants to be in a position like this. This is where due diligence comes in. Due diligence is the “homework” you do on the business you want to acquire. It allows you to make an informed decision regarding the business you want to buy.
What is due diligence?
Due diligence is an investigation of the potential acquisition (the business you want to acquire) to confirm, to the buyer’s (your) satisfaction, whether or not to carry on with the transaction (of buying the business). The process in an in-depth examination. It looks to authenticate the profits of the business and verify the representations made by the seller about that business. It involves looking for any key issues relating to the business that the seller might not have disclosed. The findings revealed by a comprehensive due diligence allow you to evaluate the business and its risks.
Here are our top 4 tips for doing due diligence well.
Top 4 tips
Before you conduct a thorough due diligence, it is essential to prepare well. You need to have a detailed plan that sets out every step you want to take and every area you want to cover in your due diligence. In your plan, you should set out which specific tasks need to be covered by specific people (such as lawyers and accountants). You should also set out all records and information that you will require from the seller.
Give yourself enough time
If you give yourself insufficient time to do your due diligence, you will not cover every area you need to cover to be able to have all the information you need. The size of the business can have a major impact on time you spend investigating. However, all businesses have many key areas, including small businesses. You need to be able to investigate those areas. Consider the circumstances, be realistic and allow yourself sufficient time. Don’t rush.
Investigate beyond just the financials
Doing due diligence well means going beyond merely the financials of the business. There is a lot more to the business that you are looking to buy. You need to examine the non-financial areas as well to be able to arrive at a fully informed decision. Many people forget to look at these other key areas.
Ask key questions
Be sure to think of every question you might want to ask the seller, so as to get the fullest picture possible. There are many questions you should ask, but here are just four examples:
- Why is the business for sale? (If the answer is not clear, you should probably walk away.)
- Is the business solvent?
- What is the future of this business and its competition?
- Are there any legal cases pending against the business?
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