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I’m going to buy a business. Give me some tips about due diligence.

So… You’re considering buying a business. Conducting due diligence ensures you know what you’re buying exactly. Due diligence is a professional way to assess the value of a business and risk associated with buying it. It includes thorough investigation of all the aspects of a business such as business operation, finance performance, legal and tax compliances, customer contract, intellectual properties and other asset details.

Due diligence is conducted after you and the seller agree in principle to deal, but before signing the contract.

  • Legal and Tax! When you’re going to buy a business, you need to raise number of legal and tax questions to the seller such as lease agreement, legal notices, tax obligations and intended business structure.
  • Purchase Agreements! There should be a purchase agreement including assets you are purchasing, liabilities you are assuming and cash sale records to name a few.
  • Price! Just think…what if the prospective buyer, decided not to buy your business…What, was the reason behind this? Be prepared yourself, whether you are ready to negotiate or are dependent on the seller’s accountants valuation. Overall, an independent valuation is necessary.
  • Financial Records! Analysis of the the financial records for the past three years such as balance sheet, profit and loss statement, tax returns, purchase and sale records and bank statements, should be undertaken.
  • Accounts Receivable! Think about whether you are buying accounts receivable along with purchasing the company. What about the cash flow? Has the previous owner received any payment in advance. Has the value of Accounts Receivable been discounted to make allowance for overdue accounts.
  • Sales Patterns and Records! Be sure about the sales records, product lines, bad debts, sales patterns year-by-year and month-by-month and others.