Anyone who has ever bought or sold a business, or has even thought about it, has heard the term “due diligence.” Most people I meet – entrepreneurs and the general population alike – don’t know what it is or, if they do, severely underestimate what it means.
Rather than leave you hanging, let’s take the term and compare it to something perhaps a bit more familiar. Think of when you bought your last house or condominium and the final clauses that were part of the sale. In the vast majority of cases, home sales have a series of “subject to” conditions such as financing being in place or that a home inspection has taken place.
Due diligence is the business world’s equivalent to the home inspection. Some of the questions you will ask are actually quite similar to those you would ask in a home sale:
- Is the foundation strong? (legal documentation)
- Will the roof need to be replaced in a year? (Financial issues)
- Does the vendor have clear title? (debt checks)
A scope checklist is below, but it should not be considered complete – always consult a professional (lawyer, accountant, business consultant) to ensure you have covered all the bases.
- Corporate structure – Does the business you are buying have a structure in place, and if so will you be ready to step in immediately at the tier the previous owner was in, or will strategic planning be needed off the hop? Corporate, asset, and debt searches – Are you aware of all monies that are part of the company’s structure or will anything be retained by the previous owner?
- Financial statements – Are you being given a copy of all transaction records? Is your budget in place for the remainder of the year? Have you been given a supplier list?
- Government obligations – Has the previous owner been keeping up on his or her taxes, payroll deductions, WCB payments and other facets which could haunt you after a sale is complete?
- Operational issues – Is there documentation of policies & procedures that your inherited employee base will already know and subscribe to?
- Real property review – Is the facility you’re now in up to code and safe for work? Are there any renovation projects that had been scheduled that you need to know about / manage?
- Insurance – Has this been transitioned to your name? Are you staying with the existing broker or transitioning to your own?
- Material contracts – Are your suppliers on long-term agreements or will you be scrambling in two months?
- Employment issues – Are all of your new staff staying on board? Are there any retirements / transitions you should know about?
- Litigation – Are there out-standing legal issues? What is their past record?
- Environmental issues – Are there codes that are being followed? Is there a process in place for going greener?
- Intellectual property (patents, trademarks, other) – Are you now the owner of all necessary names and titles or are you licensing it from the owner?
- Licensing issues – Are any licenses for operation set to expire or are they safe amid the transaction?
The list may seem extensive but due diligence is all about ensuring that you are protected from any surprises after a purchase is complete.
To learn more about due diligence when you’re buying a business, contact the experts at Beal Business Brokers and Advisors today at (204) 478-7266 or send us an email through our contact form.