What Does Due Diligence Mean When Buying a Business?
Due diligence is the process of checking that all of the information that you have been provided with about a business or product you are considering buying is correct. This can include the financials, tax compliance, customer contracts, intellectual property and more. It will also involve a thorough examination of the business to assess whether it has any intangible risks or liabilities. Depending on the type of business and the complexity of its operations, you may need to use an outside expert to conduct the review.
Often, you will be given access to the company’s books for a period of time in order to complete the due diligence process. It is important to take this opportunity seriously. Ideally, you will be able to find everything that you need to make a decision about the purchase, including why the owner is selling and whether or not the price being asked is fair.
If you uncover anything during the due diligence process that makes you rethink the purchase, this is your chance to ask for a reduction in the price of the business or to withdraw from the deal altogether. The seller will often expect this and be prepared to give you a discount, but it is essential to treat all of the findings seriously.
You will usually sign a confidentiality agreement before beginning the process, as you will need to be careful about what you disclose. However, you should still discuss a general checklist with your lawyer and accountant so that you don’t miss any important areas.
Financial due diligence is a broad investigation of the business’s finances, including looking at balance sheets, profit and loss statements, cash flow statements, and projections. This will also involve evaluating the business’s inventory and its values, as well as looking at the market value of the land and buildings it occupies.
Insurance due diligence is a crucial part of the process, with buyers reviewing the insurance policies held by the business, including liability, director and officer, and property and casualty. It is also worth investigating the history of claims made against the business.
Legal due diligence involves investigating the corporate structure and legal contracts, employment issues, legal disputes, intellectual property rights, and tax compliance. It is important to check that the company has no outstanding lawsuits, and to consider the likelihood of new ones being brought against it in the future.
Operational due diligence involves assessing the quality of the company’s operations, including IT and systems, people and culture, sales and marketing, supply chain, logistics, and any intangible assets or intellectual property it has. It is important to check that the company is achieving its expected returns and that it is on track to meet its growth targets.
You should also look at how the business manages its customers and suppliers. This can include things like whether it has high customer concentration or if it rely heavily on one supplier, and it’s worth asking the company what its plan is to mitigate this.